-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TKNtryIV3Iu/PTgheWH0T47bKZlRaN6Rpo/dUasoGt1fxSb+oYbhs+0gDF2AWU0J Xwbqyqy6I4JZUfPofp9z+Q== 0000898430-01-502382.txt : 20010917 0000898430-01-502382.hdr.sgml : 20010917 ACCESSION NUMBER: 0000898430-01-502382 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSON RESPIRATORY CARE INC CENTRAL INDEX KEY: 0001061893 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 951867330 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: 1934 Act SEC FILE NUMBER: 333-56097 FILM NUMBER: 1736858 BUSINESS ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 BUSINESS PHONE: 9096765611 MAIL ADDRESS: STREET 1: 27711 DIAZ RD STREET 2: P O BOX 9020 CITY: TEMECULA STATE: CA ZIP: 92589 10-Q/A 1 d10qa.txt FORM 10-Q AMENDMENT NO. 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Form 10-Q/A Amendment No. 1 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2001 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________. Commission file number - 333-56097 _________________ HUDSON RESPIRATORY CARE INC. (Exact name of registrant as specified in its charter) _________________ California 95-1867330 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 27711 Diaz Road, P.O. Box 9020 92589 Temecula, California (Zip Code) (Address of Principal Executive Offices) (909) 676-5611 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report). Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [_] No [X] The number of shares of Common Stock, $0.01 par value, outstanding (the only class of common stock of the Company outstanding) was 10,391,435 on August 20, 2001. ================================================================================ HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES QUARTER ENDED JUNE 30, 2001 TABLE OF CONTENTS Page ---- PART I. FINANCIAL INFORMATION Item 1. Unaudited Condensed Consolidated Financial Statements: Unaudited Condensed Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001..................... 1 Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the Three and Six months Ended June 30, 2000 and 2001....... 3 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2000 and 2001. 4 Notes to Unaudited Condensed Consolidated Financial Statements.............................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K........................ 22 SIGNATURE............................................................... 23 i The undersigned registrant hereby amends the following items of its Quarterly Report on Form 10-Q for the quarter ended June 30, 2001 as set forth below: PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITIED CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (Dollar Amounts in Thousands)
December 31, June 30, 2000 2001 ------------ ---------- CURRENT ASSETS: Cash......................................... $ 3,530 $ 4,258 Accounts receivable, less allowance for doubtful accounts of $3,500 and $3,757 at December 31, 2000 and June 30, 2001, respectively................................ 28,307 28,718 Inventories.................................. 44,610 34,491 Other current assets......................... 1,832 1,903 -------- -------- Total current assets...................... 78,279 69,370 -------- -------- PROPERTY, PLANT AND EQUIPMENT, net............. 49,425 47,749 -------- -------- OTHER ASSETS: Intangible assets, net....................... 67,573 61,268 Deferred financing costs, net................ 9,587 8,867 Deferred tax asset........................... 69,105 69,117 Other assets................................. 1,265 3,575 -------- -------- Total other assets......................... 147,530 142,827 -------- -------- Total assets............................. $275,234 $259,946 ======== ========
The accompanying notes are an integral part of these condensed consolidated statements. 1 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES, MANDATORILY-REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (Dollar Amounts in Thousands)
December 31, June 30, 2000 2001 ------------ ---------- CURRENT LIABILITIES: Notes payable to bank......................... $ 10,686 $ 12,184 Accounts payable.............................. 20,320 11,767 Accrued liabilities........................... 12,707 12,737 Note payable to affiliates.................... 2,000 5,000 Other current liabilities..................... 3,007 2,404 --------- --------- Total current liabilities................... 48,720 44,092 --------- --------- NOTE PAYABLE TO AFFILIATE, net of current portion........................................ 8,266 8,717 SENIOR SUBORDINATED NOTES PAYABLE............... 115,000 115,000 NOTES PAYABLE TO BANK, net of current portion... 85,962 87,191 OTHER NON-CURRENT LIABILITIES................... -- 981 --------- --------- Total liabilities............................. 257,948 255,981 --------- --------- MANDATORILY-REDEEMABLE PREFERRED STOCK, $0.01 par value: authorized -- 1,800 shares; issued and outstanding -- 421 shares; liquidation preference: $40,610............................ 39,043 41,329 Accrued preferred stock dividend, payable in kind......................................... 1,018 1,092 --------- --------- 40,061 42,421 --------- --------- STOCKHOLDERS' EQUITY (DEFICIT): Common stock, no par value: Authorized -- 15,000 shares, issued and Outstanding -- 10,387 and 10,391 at December 31, 2000 and June 30, 2001, respectively............................... 98,158 98,962 Cumulative translation adjustment............. (1,151) 3,409 Accumulated deficit........................... (119,782) (140,827) --------- --------- Total stockholders' equity (deficit)....... (22,775) (38,456) --------- --------- Total liabilities, mandatorily-redeemable preferred stock and stockholders' equity (deficit)............................... $ 275,234 $ 259,946 ========= =========
The accompanying notes are an integral part of these condensed consolidated statements 2 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (Dollar Amounts in Thousands)
Three Months Ended Six Months Ended ------------------ ---------------- June 30, June 30, June 30, June 30, 2000 2001 2000 2001 -------- -------- -------- -------- NET SALES........................... $31,811 $40,801 $72,618 $ 78,606 COST OF SALES....................... 14,825 24,961 37,328 52,991 ------- ------- ------- -------- Gross Profit...................... 16,986 15,840 35,290 25,615 ------- ------- ------- -------- OPERATING EXPENSES: Selling, distribution, general & administrative.................. 10,796 13,261 19,525 25,782 Amortization of goodwill......... 817 1,279 1,620 3,245 Research and development......... 629 436 1,249 901 ------- ------- ------- -------- 12,242 14,976 22,394 29,928 ------- ------- ------- -------- Income (loss) from operations. 4,744 864 12,896 (4,313) INTEREST EXPENSE AND OTHER......... 5,130 6,343 10,467 13,842 ------- ------- ------- -------- Net income (loss) before benefit for income taxes................ (386) (5,479) 2,429 (18,155) PROVISION FOR INCOME TAXES......... (1) 340 1,215 527 ------- ------- ------- -------- Net Income (loss)................ $ (385) $(5,819) $ 1,214 $(18,682) OTHER COMPREHENSIVE INCOME: Foreign currency translation gain (loss)..................... 101 3,831 307 4,560 ------- ------- ------- -------- Comprehensive income (loss).... $ (284) $(1,988) $ 1,521 $ 14,122 ======= ======= ======= ========
The accompanying notes are an integral part of these condensed consolidated statements. 3 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollar Amounts in Thousands)
Six Months Ended ----------------- June 30, June 30, 2000 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)......................................... $ 1,214 $(18,682) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities -- Depreciation and amortization........................... 5,310 5,979 Amortization of deferred financing costs................ 490 505 Deferred taxes.......................................... 88 (13) Change in operating assets and liabilities: Accounts receivable..................................... (5,483) (411) Inventories............................................. (6,849) 10,120 Other current assets.................................... 2,392 (71) Other assets............................................ 135 (2,310) Accounts payable........................................ 2,376 (8,553) Accrued liabilities..................................... 3,452 30 Other current liabilities............................... (87) (603) Other non-current liabilities........................... -- 981 ------- -------- Net cash provided by (used in) operating activities... 3,038 (13,028) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment................ (5,755) (2,464) (Additions) retirements of intangible assets.............. -- 4,464 ------- -------- Net cash used in investing activities................. (5,755) 2,000 CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of notes payable to bank........................ (1,500) (3,500) Proceeds from bank borrowings............................. 3,764 6,227 Repayment of notes payable to affiliates.................. -- (6,000) Proceeds from notes payable to affiliates................. -- 9,451 Additions of deferred financing costs..................... -- 215 Sale of common stock, net of costs........................ -- 803 ------- -------- Net cash provided by (used in) financing activities... 2,246 7,196 Effect of exchange rate changes on cash..................... 307 4,560 ------- -------- NET INCREASE IN CASH........................................ (146) 728 CASH, beginning of period................................... 2,917 3,530 ------- -------- CASH, end of period......................................... $ 2,771 $ 4,258 ======= ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest................................................ $ 6,700 $ 7,693 NON-CASH FINANCING ACTIVITIES: Preferred dividends accrued or paid-in-kind............... $ 2,118 $ 2,361 ======= ========
The accompanying notes are an integral part of these condensed consolidated statements. 4 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 1. Financial Statements. The condensed consolidated financial statements -------------------- included herein have been prepared by the Company, without audit, and include all adjustments which are, in the opinion of management, necessary for a fair presentation of the financial position at June 30, 2001, and the results of operations and cash flows for the six-month periods ended June 30, 2000 and June 30, 2001 pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although the Company believes that the disclosures in such financial statements are adequate to make the information presented not misleading, the accompanying unaudited condensed, consolidated financial statements should be read in conjunction with the Company's 2000 audited financial statements and the notes thereto included in its Form 10-K filed with the SEC. The results of operations for the six-month period ended June 30, 2001 are not necessarily indicative of the results to be achieved for a full year. 2. Recent Accounting Pronouncements. In June 1998, the Financial Accounting --------------------------------- Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The impact of adoption was not material to the financial statements. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The Company will adopt SFAS 141 for all business combinations initiated after June 30, 2001. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill would no longer be amortized but would be assessed at least annually for impairment using a fair value methodology. The Company will adopt this statement for all goodwill and other intangible assets acquired after June 30, 2001 and for all existing goodwill and other intangible assets beginning January 1, 2002. Upon adoption of this standard on January 1, 2002, the Company will cease recording amortization of goodwill which would increase net income in 2002 by approximately $2.8 million, net of income taxes. Other than ceasing the amortization of goodwill, the Company does not anticipate that the adoption of SFAS 142 will have a significant effect on our financial position or the results of our operations as the Company does not currently anticipate any impairment charges for existing goodwill. 5 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 3. Inventories. Inventories consisted of the following (amounts in ----------- thousands):
December 31, June 30, 2000 2001 ------------ ---------- Raw materials........................... $ 8,134 $ 7,090 Work-in-process......................... 6,591 5,161 Finished goods.......................... 29,885 22,240 ------- ------- $44,610 $34,491 ======= =======
4. Subsidiaries Guaranteeing Debt and Segment Data. The Company is the 100% ----------------------------------------------- owner of certain subsidiaries that do not guarantee the Company's senior subordinated notes and certain bank debt. The following tables disclose required consolidating financial information for guarantor, including the Company, and non-guarantor subsidiaries (amounts in thousands): 6 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of June 30, 2001 ----------------------------------------------- Guarantor Non-Guarantor Adjustments Total --------- ------------- ----------- --------- CURRENT ASSETS: Cash..................... $ 2,010 $ 2,248 $ -- $ 4,258 Accounts receivable...... 34,923 5,492 (11,697) 28,718 Inventories.............. 28,433 7,735 (1,677) 34,491 Other current assets..... 4,997 78,737 (81,831) 1,903 -------- -------- --------- -------- Total current assets... 70,363 94,212 (95,205) 69,370 PROPERTY, PLANT AND EQUIPMENT, NET............ 46,654 1,095 -- 47,749 OTHER ASSETS: Intangible assets, net... 26,627 34,641 -- 61,268 Deferred financing costs, net..................... 8,867 -- -- 8,867 Deferred tax asset....... 68,881 236 -- 69,117 Investment in non- guarantor subsidiaries.. 29,245 -- (29,245) -- Other.................... 380 3,195 -- 3,575 -------- -------- --------- -------- Total other assets..... 134,000 $ 38,072 $ (29,245) $142,827 -------- -------- --------- -------- 251,017 133,379 $(124,450) $259,946 ======== ======== ========= ======== CURRENT LIABILITIES: Notes payable to bank.... 8,500 3,684 -- 12,184 Accounts payable......... 17,149 1,276 (6,658) 11,767 Accrued liabilities...... 10,522 2,215 -- 12,737 Notes payable to affiliate............... 5,000 -- -- 5,000 Other current liabilities 971 23,960 (22,527) 2,404 -------- -------- --------- -------- Total current liabilities........... 42,142 31,135 (29,185) 44,092 OTHER LIABILITIES: Note payable to affiliate, net off current portion......... 6,451 2,266 -- 8,717 Notes payable to bank, net of current portion.. 72,500 14,691 -- 87,191 Senior subordinated notes 115,000 -- -- 115,000 Other non-current liabilities............. -- 981 -- 981 -------- -------- --------- -------- Total liabilities...... 236,093 49,073 (29,185) 255,981 Mandatorily-redeemable preferred stock........... 42,421 -- -- 42,421 STOCKHOLDERS' EQUITY (DEFICIT)................. 27,497 84,306 (95,265) (38,456) -------- -------- --------- -------- $251,017 $133,379 $(124,450) $259,946 ======== ======== ========= ========
7 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2000 ----------------------------------------------- Guarantor Non-Guarantor Adjustments Total --------- ------------- ----------- --------- CURRENT ASSETS: Cash........................ $ 437 $ 3,093 $ -- $ 3,530 Accounts receivable......... 32,665 4,395 (8,753) 28,307 Inventories................. 38,703 7,973 (2,066) 44,610 Other current assets........ 6,350 52,467 (56,985) 1,832 -------- -------- -------- -------- Total current assets...... 78,155 67,928 (67,804) 78,279 PROPERTY, PLANT AND EQUIPMENT, NET.......................... 48,260 1,165 -- 49,425 OTHER ASSETS: Intangible assets, net....... 27,719 39,854 -- 67,573 Deferred financing costs, net......................... 9,587 -- -- 9,587 Deferred tax asset........... 68,881 224 -- 69,105 Investment in non-guarantor subsidiaries................ 29,245 -- (29,245) -- Other........................ 294 971 -- 1,265 -------- -------- -------- -------- Total other assets......... 135,726 41,049 (29,245) 147,530 -------- -------- -------- -------- $262,141 $110,142 $(97,049) $275,234 ======== ======== ======== ======== CURRENT LIABILITIES: Notes payable to bank....... $ 7,500 $ 3,186 $ -- $ 10,686 Accounts payable............ 24,758 4,711 (9,149) 20,320 Accrued liabilities......... 9,420 3,287 -- 12,707 Notes payable to affiliate.. 2,000 -- -- 2,000 Other current liabilities... 1,242 22,764 (20,999) 3,007 -------- -------- -------- -------- Total current liabilities. 44,920 33,948 (30,148) 48,720 OTHER LIABILITIES: Note payable to affiliate, net of current portion..... -- 8,266 -- 8,266 Notes payable to bank, net of current portion......... 75,000 10,962 -- 85,962 Senior subordinated notes... 115,000 -- -- 115,000 Other non-current liabilities................ -- 1,095 (1,095) -- -------- -------- -------- -------- Total liabilities......... 234,920 54,271 (31,243) 257,948 -------- -------- -------- -------- Mandatorily-redeemable preferred stock.............. 40,061 -- -- 40,061 STOCKHOLDERS' EQUITY (DEFICIT) (12,840) 55,871 (65,806) (22,775) -------- -------- -------- -------- $262,141 $110,142 $(97,049) $275,234 ======== ======== ======== ========
8 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2001 ----------------------------------------------- Guarantor Non-Guarantor Adjustments Total --------- ------------- ----------- --------- NET SALES.................... $37,026 $7,033 $(3,258) $40,801 COST OF SALES................ 24,724 3,734 (3,497) 24,961 ------- ------ ------- ------- Gross Profit............... 12,302 3,299 239 15,840 OPERATING EXPENSES: Selling, distribution, general and administrative 11,531 1,730 -- 13,261 Goodwill amortization...... 385 894 -- 1,279 Research and development... 179 257 -- 436 ------- ------ ------- ------- 12,095 2,881 -- 14,976 ------- ------ ------- ------- Income (loss) from operations................ 207 418 239 864 INTEREST AND OTHER EXPENSE... 4,949 425 -- 6,343 ------- ------ ------- ------- Income (loss) before provision (benefit) for income taxes.............. (4,742) (7) (730) (5,479) PROVISION (BENEFIT) FOR INCOME TAXES................ -- 340 -- 340 ------- ------ ------- ------- Net Income (loss)............ $(4,742) $ (347) $ (730) $(5,819) ======= ====== ======= =======
9 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Three Months Ended June 30, 2000 ----------------------------------------------- Guarantor Non-Guarantor Adjustments Total --------- ------------- ----------- --------- NET SALES.................... $29,746 $4,823 $(2,758) $31,811 COST OF SALES................ 15,634 1,949 (2,758) 14,825 ------- ------ ------- ------- Gross Profit............... 14,112 2,874 -- 16,986 OPERATING EXPENSES: Selling, distribution, general and administrative 9,211 1,585 -- 10,796 Amortization of goodwill... 329 488 -- 817 Research and development... 290 339 -- 629 ------- ------ ------- ------- 9,830 2,412 -- 12,242 ------- ------ ------- ------- Income (loss) from operations................ 4,282 462 -- 4,744 ------- ------ ------- ------- INTEREST AND OTHER EXPENSE. 4,598 532 -- 5,130 ------- ------ ------- ------- Income (loss) before provision (benefit) for income taxes.............. (316) (70) -- (386) PROVISION (BENEFIT) FOR INCOME TAXES................ (125) 124 -- (1) ------- ------ ------- ------- Net Income (loss)............ $ (191) $ 194 $ -- $ (385) ======= ====== ======= =======
10 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001 -------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- --------- NET SALES............................................................... $ 72,219 $13,008 $(6,621) $ 78,606 COST OF SALES........................................................... 52,124 6,935 (6,068) 52,991 -------- ------- ------- -------- Gross Profit........................................................... 20,095 6,073 (553) 25,615 OPERATING EXPENSES: Selling, distribution, general and administrative...................... 22,619 3,163 -- 25,782 Amortization of goodwill............................................... 770 2,475 -- 3,245 Research and development............................................... 394 507 -- 901 -------- ------- ------- -------- 23,783 6,145 -- 29,928 -------- ------- ------- -------- Income (loss) from operations.......................................... (3,688) (72) (553) (4,313) -------- ------- ------- -------- INTEREST AND OTHER EXPENSE............................................. 9,585 2,175 2,082 13,842 -------- ------- ------- -------- Income (loss) before provision (benefit) for income taxes.............. (13,273) (2,247) (2,635) (18,155) PROVISION (BENEFIT) FOR INCOME TAXES.................................... -- 527 -- 527 -------- ------- ------- -------- Net Income (loss)....................................................... $(13,273) $(2,774) $(2,635) $(18,682) ======== ======= ======= ========
11 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Six Months Ended June 30, 2001 -------------------------------------------- Non- Guarantor Guarantor Adjustments Total --------- --------- ----------- --------- NET SALES............................................................... $64,018 $13,672 $(5,072) $72,618 COST OF SALES........................................................... 35,963 6,237 (4,872) 37,328 ------- ------- ------- ------- Gross Profit........................................................... 28,055 7,435 (200) 35,290 OPERATING EXPENSES: Selling, distribution, general and administrative...................... 16,082 3,443 -- 19,525 Amortization of goodwill............................................... 598 1,022 -- 1,620 Research and development............................................... 572 677 -- 1,249 ------- ------- ------- ------- 17,252 5,142 -- 22,394 ------- ------- ------- ------- Income from operations................................................. 10,803 2,293 (200) 12,896 ------- ------- ------- ------- INTEREST AND OTHER EXPENSE............................................. 9,150 1,317 -- 10,467 ------- ------- ------- ------- Income before provision for income taxes.............................. 1,653 976 (200) 2,429 PROVISION FOR INCOME TAXES............................................. 699 516 -- 1,215 ------- ------- ------- ------- Net Income.............................................................. $ 954 $ 460 $ (200) $ 1,214 ======= ====== ======= =======
12 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2001 HUDSON RESPIRATORY CARE INC. AND SUBSIDIARIES GUARANTOR AND NON-GUARANTOR SUBSIDIARIES UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
Six Months Ended June 30, 2001 ------------------------------------- Non- Guarantor Guarantor Total --------- --------- ----------- Net cash provided by (used in) operating activities...................... $(4,535) $(8,493) $(13,028) Net cash provided by (used in) investing activities...................... (1,977) 3,977 2,000 Net cash provided by financing activities................................ 3,735 3,461 7,196 Effect of exchange rate changes on cash.................................. -- 4,560 4,560 ------- ------- -------- NET (DECREASE) INCREASE IN CASH.......................................... (2,777) 3,505 728 CASH, beginning of period................................................ 437 3,093 3,530 CASH, end of period...................................................... $ 2,010 $ 2,248 $ 4,258 ======= ======= ========
Six Months Ended June 30, 2001 ------------------------------------- Non- Guarantor Guarantor Total --------- --------- ----------- Net cash provided by (used in) operating activities...................... $ (350) $ 3,388 $ 3,038 Net cash used in investing activities.................................... (3,708) (2,047) (5,755) Net cash provided by financing activities................................ 3,900 (1,636) 2,264 Effect of exchange rate changes on cash.................................. 81 226 307 ------- ------- ------- NET DECREASE IN CASH..................................................... (77) (69) (146) CASH, beginning of period................................................ 184 2,733 2,917 ------- ------- ------- CASH, end of period...................................................... $ 107 $ 2,664 $ 2,771 ======= ======= =======
The Company operates in two segments: North American operations (guarantor) and international operations (non-guarantor). The financial data of these two segments closely approximates the guarantor/non-guarantor information set forth above and, accordingly, separate segment data is not provided. On March 21, 2001, the Company replaced its existing lending agreement denominated in Swedish Krona with a new loan that allows for borrowings up to $19.1 million. The principal is amortized over 18 equal quarterly payments commencing June 30, 2001. Interest is based on the STIBOR rate + 0% to 1.65%, based on the outstanding balance of the loan. The loan is secured by Hudson Euro SarL, a wholly-owned subsidiary of the Company and 100% owner of Hudson RCI AB, Hudson RCI UK Ltd. and Hudson France S.A.S. 13 5. Subsequent Events. ------------------ The Company was not in compliance with certain restrictive covenants of the Credit Facility at June 30, 2001. Subsequently, the Company amended its Credit Facility covenants so that under the amended terms, the Company was in compliance as of June 30, 2001 and the Company expects to remain in compliance throughout the term of the agreement. As part of the amendment, (1) the Company's shareholders agreed to invest an additional $18 million, of which $11.4 million was invested in April and May of 2001, and (2) interest rate margins were increased. In August 2001, the Company issued for cash unsecured senior subordinated convertible notes to certain managers and shareholders in the amount of $3,500,000. The notes bear interest at 10% and are due in 2005. The interest may be paid or deferred to the due date at the option of the Company and are convertible to common stock at the demand of the holder. Additionally, in August 2001 existing shareholders contributed $3.0 million in redeemable preferred stock of Holding (which Holding invested in preferred stock of the Company). 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Hudson Respiratory Care Inc.'s (the "Company" or "Hudson RCI") consolidated historical results of operations and financial condition should be read in conjunction with the consolidated financial statements of the Company and the notes thereto included elsewhere in this Form 10-Q. Forward-Looking Statements This Management's Discussion and Analysis of Financial Condition and Results of Operations contains certain "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Such statements relating to future events and financial performance are forward-looking statements involving risks and uncertainties that are detailed from time to time in the Company's Securities and Exchange Commission filings. General The Company has increased its net sales and improved its position within the disposable health care products market in recent years by increasing its respiratory care product offering, introducing disposable products for the anesthesia health care market, expanding its presence in international markets and establishing a position in the growing alternate site market. The Company's results of operations may fluctuate significantly from quarter to quarter as a result of a number of factors, including, among others, the buying patterns of the Company's distributors, group purchasing organizations ("GPOs") and other purchasers of the Company's products, forecasts regarding the severity of the annual cold and flu season, announcements of new product introductions by the Company or its competitors, changes in the Company's pricing of its products and the prices offered by the Company's competitors, rate of overhead absorption due to variability in production levels and variability in the number of shipping days in a given quarter. Recent Developments Beginning in April 2000, the company experienced disruption to its operations resulting from difficulties in the implementation of a new management information system. Consequently, the Company's financial results for the quarter ended June 30, 2001 reflect increased freight, distribution, and general and administrative expenses related to the system implementation. The Company also experienced liquidity pressures beginning in the fourth quarter of 2000 due to such expense increases, delays in the collection of due receivables and unplanned increases in inventory related to difficulties in implementation and a lack of familiarity with the new system. Management has implemented a series of initiatives in 2001 designed to improve the Company's proficiency with the new management information system, decrease the Company's operating expenses, improve receivables collections and reduce inventory levels. Despite the disruption related to the system implementation, management believes it has generally maintained strong customer service levels and relationships. 15 Results of Operations The following tables set forth, for the periods indicated, certain income and expense items expressed in dollars and as a percentage of the Company's net sales.
Three Month Period Ended Six Month Period Ended (unaudited) (unaudited) ----------------------------- ---------------------------- June 30, June 30, June 30, June 30, 2000 2001 2000 2001 ------------ ------------- ------------ ------------ (in thousands) (in thousands) Net sales.............................. $31,811 $40,801 $72,618 $78,606 Cost of sales.......................... 14,825 24,961 37,328 52,991 ------- ------- ------- ------- Gross profit.......................... 16,986 15,840 35,290 Selling expenses....................... 3,896 5,760 7,715 10,571 Distribution expenses.................. 1,990 2,221 3,463 4,998 General and administrative expenses.... 4,910 5,280 8,347 10,213 Amortization of goodwill............... 817 1,279 1,620 3,245 Research and development expenses...... 629 436 1,249 901 ------- ------- ------- ------- Total operating expenses............... 12,242 14,976 22,394 29,928 ------- ------- ------- ------- Operating income....................... $ 4,744 $ 864 $12,896 $(4,313) ======= ======= ======= =======
Three Month Period Ended Six Month Period Ended (unaudited) (unaudited) ----------------------------- ---------------------------- June 30, June 30, June 30, June 30, 2000 2001 2000 2001 ------------ ------------- ------------ ------------ Net sales............................ 100.0% 100.0% 100.0% 100.0% Cost of sales........................ 46.6 61.2 51.4 67.4 ----------- ------------- ------------ ------------ Gross profit........................ 53.4 38.8 48.0 32.6 Selling expenses..................... 12.2 14.1 10.6 13.4 Distribution expenses................ 6.3 5.4 4.8 6.4 General and administrative expenses.. 15.4 12.9 11.5 13.0 Amortization of goodwill............. 2.6 3.1 2.2 4.1 Research and development expenses.... 2.0 1.1 1.7 1.1 ----------- ------------- ------------ ------------ Total operating expenses............. 38.5 36.7 30.8 38.1 ----------- ------------- ------------ ------------ Operating income..................... 14.9% 2.1% 17.8% (5.5)% =========== ============= ============ ============
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000 Net sales, reported net of accrued rebates, were $40.8 million in the second quarter of 2001 as compared to $31.8 million in the second quarter of 2000, an increase of $9.0 million or 28.3%. Domestic hospital sales increased by $2.6 million or 12.7% due to shipping difficulties encountered in the second quarter of 2000 relating to the implementation of the new management information system. Additionally, sales in the second quarter of 2001 reflect sales of the acquired SHERIDAN product line. Alternate site sales increased by $1.0 million or 19.3%, the result of shipping difficulties associated with the new management information system in the second quarter of 2000. International sales increased by $4.9 million or 102%, the result of shipping difficulties associated with the new management information system in the second quarter of 2000, as well as sales of the acquired SHERIDAN product line. OEM sales increased by $0.5 million due to changes in purchasing patterns from some of its OEM customers. The Company's gross profit for the second quarter of 2001 was $15.8 million, a decrease of $1.1 million or 6.7% from the second quarter of 2000. As a percentage of sales, gross profit was 38.8% and 53.4% for the second quarter of 2001 and 2000, respectively. This decrease was primarily due to the recognition of inventory revalued as a result of the Tyco SHERIDAN acquisition, increased shipping costs as a result of shipping difficulties caused by 16 problems associated with the new management information system, underabsorption of manufacturing overhead as a result of an aggressive plan to reduce inventories by slowing production and an unfavorable mix variance caused by higher sales of products with lower gross margins. Selling expenses were $5.8 million for the second quarter of 2001, a $1.9 million increase over the second quarter of 2000. This increase was due primarily to increases in staffing levels required to support additional product lines and costs associated with the France and U.K. sales offices established in fiscal 2000. As a percentage of net sales, selling expenses were 14.1% in the second quarter of 2001 as compared to 12.2% in the second quarter of 2000. Distribution expenses were $2.2 million for the second quarter of 2001, an increase of $0.2 million or 11.6% over the second quarter of 2000. As a percentage of sales, distribution expenses decreased to 5.4% in the second quarter of 2001 as compared to 6.3% in the second quarter of 2000. The increase is primarily the result of the increased cost of freight between the Company's distribution facilities, increased headcount to operate the new management information system and additional expenses related to the establishment of an expanded Temecula distribution facility. However, this increase would have been greater if not offset by high levels of overtime in the second quarter of 2000, the result of difficulties with the implementation and lack of experience with the new management information system. General and administrative expenses were $5.3 million in the second quarter of 2001, an increase of $0.4 million or 7.5% over the second quarter of 2000. This increase resulted primarily from increased staffing levels required to maintain acceptable customer service levels and operate the business with the new management information system. As a percentage of net sales, general and administrative expenses were 12.9% in the second quarter of 2001 as compared to 15.4% in the second quarter of 2000. Research and development expenses were $0.4 million for the second quarter of 2001, a decrease of $0.2 million from the second quarter of 2000. Interest expense and other was $6.3 million for the second quarter of 2001, as compared to $5.1 million in the second quarter of 2000. The increase was due to higher debt levels as a result of the Tyco SHERIDAN acquisition and increased borrowings for working capital requirements. Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000 Net sales, reported net of accrued rebates, were $78.6 million in the first six months of 2001 as compared to $72.6 million in the first six months of 2000, representing an increase of $6.0 million or 8.2%. Domestic hospital sales were $45.4 million for the first six months of 2001, a decrease of $0.1 million or 0.3% from the first six months of 2000. Shipping difficulties in the second quarter of 2000 and sales in 2001 of the SHERIDAN product line, acquired in the fourth quarter of 2000, were offset by a weak influenza season in early 2001. Alternate site sales increased by $1.2 million or 10.9%, the result of shipping difficulties in the second quarter of 2000 relating the implementation of the management information system. International sales increased by $4.9 million or 36.9%, the result of 2001 sales of SHERIDAN products as well as the shipping difficulties seen in the second quarter of 2000. OEM sales were $2.4 million in the first six months of 2001, unchanged from the first six months of 2000. The Company's gross profit for the first six months of 2001 was $25.6 million, a decrease of $9.7 million or 27.4% from the first six months of 2000. As a percentage of sales, the gross profit was 32.6% and 48.0% for the first six months of 2001 and 2000, respectively. This decrease was primarily due to the recognition of inventory revalued as a result of the Tyco SHERIDAN acquisition, increased shipping costs as a result of shipping difficulties caused by problems associated with the new management information system, underabsorption of manufacturing overhead as a result of an aggressive plan to reduce inventories by slowing production, and an unfavorable mix variance caused by higher sales of products with lower gross margins. In addition, certain non-recurring, unfavorable inventory adjustments occurred in the first quarter of 2001 as a result of a lack of familiarity with the new management information system. Selling expenses were $10.6 million for the first six months of 2001, a $2.9 million increase over the first six months of 2000. This increase was due primarily to increases in staffing levels required to support additional product lines and costs associated with the France and U.K. sales offices established in fiscal 2000. As a percentage of net sales, selling expenses were 13.4% in the first six months of 2001 as compared to 10.6% in the first six months of 2000. 17 Distribution expenses were $5.0 million for the first six months of 2001, an increase of $1.5 million or 44.3% over the first six months of 2000. As a percentage of sales, distribution expenses increased to 6.4% in the first six months of 2001 as compared to 4.8% in the first six months of 2000. The increase is primarily the result of the increased cost of freight between the Company's distribution facilities, increased headcount to operate the new management information system and additional expenses related to the establishment of an expanded Temecula distribution facility. General and administrative expenses were $10.2 million in the first six months of 2001, an increase of $1.9 million or 22.3% over the first six months of 2000. This increase resulted primarily from increased staffing levels required to maintain acceptable customer service levels and operate the business with the new management information system. As a percentage of net sales, general and administrative expenses were 13.0% in the first six months of 2001 as compared to 11.5% in the first six months of 2000. Research and development expenses were $1.2 million for the first six months of 2001, a decrease of $0.3 from the first six months 2000. Interest expense was $10.4 million for the first six months of 2001, as compared to $9.8 million in the first six months of 2000. The increase was due to higher debt levels as a result of the Tyco SHERIDAN acquisition. Liquidity and Capital Resources The Company's primary sources of liquidity are cash flow from operations, borrowings under its working capital bank facility and historically, investments from shareholders. Cash provided by (used in) operations totaled $3.0 million and $(13.0) million in the first six months of 2000 and 2001, respectively. The decrease from the second quarter of 2000 to the second quarter of 2001 is primarily attributable to decreased operating income, increased interest expense due to higher debt levels and a decline in accounts payable. For the six months ended June 30, 2001, the Company reduced trade payables by approximately $8.5 million. This was partially offset by a $10.1 million reduction in inventories. The Company had operating working capital, excluding cash and short-term debt, of $38.7 million and $38.2 million as of December 31, 2000 and June 30, 2001, respectively. Inventories were $44.6 million and $34.5 million as of December 31, 2000 and June 30, 2001, respectively. In order to meet the needs of its customers, the Company must maintain inventories sufficient to permit same-day or next-day filling of most orders. Such inventories are higher than those that would be required for delayed filling of orders, thus adversely impacting liquidity. Over time, the Company expects its level of inventories to increase as the Company's sales in the international market increase. Accounts receivable, net of allowances, were $28.3 million and $28.8 million at December 31, 2000 and June 30, 2001, respectively. The Company typically offers 30 day credit terms to its U.S. hospital distributors. Alternate site and international customers typically receive 60 to 90 day terms and, as a result, as the Company's alternate site and international sales have increased, the amount and aging of its accounts receivable have increased. The Company anticipates that the amount and aging of its accounts receivable will continue to increase as the alternate site and international markets become a larger percentage of the Company's overall sales. During the six months ended June 30, 2001, net cash provided by investing activities was $2.0 million, reflecting purchases of manufacturing equipment, offset by exchange losses from foreign affiliates. The Company currently estimates that capital expenditures will be approximately $8.0 million in each of 2001 and 2002, consisting primarily of additional and replacement manufacturing equipment and new heater placements. During the six months ended June 30, 2001, net cash provided by financing was $7.2 million, reflecting principally additions of notes payable to affiliates and additional bank borrowings, in each case net of repayments. This was somewhat offset by repayment of certain notes payable to affiliates. On March 21, 2001, the Company replaced its existing lending agreement denominated in Swedish krona with a new loan that allows for borrowings up to $19.1 million. The principal is amortized over 18 equal quarterly payments commencing June 30, 2001. Interest is based on the STIBOR rate + 0% to 1.65%, based on the outstanding balance of the loan. The loan is secured by Hudson Euro SarL, a wholly-owned subsidiary of the company and 100% owner of Hudson RCI AB, Hudson RCI UK Ltd. and Hudson France S.A.S. 18 As of June 30, 2001, The Company had outstanding $228.0 million of indebtedness, consisting of $115.0 million of Subordinated Notes, borrowings of $81.0 million under the Company's Credit Facility, $13.7 million in notes payable to affiliates and $18.4 million in outstanding borrowings under the bank facility of Hudson RCI AB. The Credit Facility currently consists of a $40.0 million Term Loan Facility and a $55.0 million Revolving Loan Facility of which up to $40.0 million (all of which has been borrowed and is outstanding) may be used for permitted acquisitions and up to $15 million (the "Working Capital Portion") may be used for general corporate purposes (other than acquisitions). The Revolving Loan Facility has a letter of credit sublimit of $7.5 million. As of January, 2001 the Company had fully utilized the Working Capital Portion of the Revolving Loan Facility. The Term Loan Facility matures on June 30, 2003 and, commencing June 30, 1999, requires quarterly principal installments totaling $3.0 million in 1999, $5.5 million in 2000, $7.5 million in 2001, $9.5 million in 2002 and $14.5 million in 2003. The Revolving Loan Facility matures on June 30, 2003. The interest rate under the Credit Facility is based, at the option of the Company, upon either a Eurodollar rate or a base rate (as defined) plus a margin during the period and for the applicable type of loan as follows: Margin --------------------- Period and Loan Type Base Rate Eurodollar - -------------------- ---------- ---------- Through June, 2002 Term and Working Capital 3.00% 4.00% Acquisition 3.25% 4.25% July, 2002 through March, 2003 Term and Working Capital 3.50% 4.50% Acquisition 3.75% 4.75% Thereafter Term and Working Capital 4.00% 5.00% Acquisition 4.25% 5.25% For periods after June, 2002, the margins set forth above are subject to pricing reductions depending on the Company's then existing leverage ratio. Borrowings under the Credit Facility are required to be prepaid, subject to certain exceptions, with (i) 75% (or 50% for years when the Company's ratio of Debt to EBITDA (as defined) is less than 5:1) of Excess Cash Flow (as defined), (ii) 50% of the net cash proceeds of an equity issuance by River Holding Corp., the Company's parent ("Holding") or the Company in connection with an initial public offering or 100% of the net cash proceeds of an equity issuance by Holding. Holding or the Company other than in connection with an initial public offering (subject in each case to certain exceptions), (iii) 100% of the net cash proceeds of the sale or other disposition of any properties or assets of Holding and its subsidiaries (subject to certain exceptions), (iv) 100% of the net proceeds of certain issuances of debt obligations of the Company and its subsidiaries and (v) 100% of the net proceeds from insurance recoveries and condemnations. The Revolving Loan Facility must be repaid upon payment in full of the Term Loan Facility. The Credit Facility is guaranteed by Holding and certain of the Company's subsidiaries. The Credit Facility is secured by a first priority lien in substantially all of the properties and assets of the Company and the guarantors now owned or acquired later, including a pledge of all of the capital stock of the Company owned by Holding and all of the shares held by the Company of its existing and future subsidiaries; provided, that such pledge is limited to 65% of the shares of any foreign subsidiary to the extent a pledge of a greater percentage would result in adverse tax consequences to the Company. The Credit Facility contains covenants restricting the ability of Holding, the Company and the Company's subsidiaries to, among others, (i) incur additional debt, (ii) declare dividends or redeem or repurchase capital stock, (iii) prepay, redeem or purchase debt, (iv) incur liens, (v) make loans and investments, (vi) make capital expenditures, (vii) 19 engage in mergers, acquisitions and asset sales, and (viii) engage in transactions with affiliates. Hudson RCI is also required to comply with financial covenants with respect to (a) limits on annual aggregate capital expenditures (as defined), (b) a fixed charge coverage ratio, (c) a maximum leverage ratio, (d) a minimum EBITDA test and (e) an interest coverage ratio. As of December 31, 2000, the Company was not in compliance with certain of these restrictive covenants. Subsequently, the Credit Facility has been amended and all non-compliance was cured. The Subordinated Notes bear interest at the rate of 9-1/8%, payable semiannually on each April 15 and October 15, and will require no principal repayments until maturity. The Subordinated Notes are general unsecured obligations of the Company. The Subordinated Notes contain covenants that place limitations on, among other things, (i) the ability of the Company, any subsidiary guarantors and other restricted subsidiaries to incur additional debt, (ii) the making of certain restricted payments including investments, (iii) the creation of certain liens, (iv) the issuance and sale of capital stock of restricted subsidiaries, (v) asset sales, (vi) payment restrictions affecting restricted subsidiaries, (vii) transactions with affiliates and (viii) the ability of the Company and any subsidiary guarantor to incur layered debt, (ix) the ability of Holding to engage in any business or activity other than those relating to ownership of capital stock of the Company and (x) certain mergers, consolidations and transfers of assets by or involving the Company. As of June 30, 2001, the Company had $13.7 million outstanding pursuant to unsecured promissory notes payable to affiliates of Freeman Spogli. The notes bear interest at 12.0% per annum to 14.0% per annum and mature in August 2006. Of these notes, $2.0 million require semiannual interest payments. The Company, through Hudson RCI AB, has incurred bank debt in Sweden (the "HRCI AB Facility") that totaled $14.1 million as of June 30, 2001. The HRCI AB Facility, which is denominated in Swedish krona, bears interest at three-month STIBOR plus 0.75% to 1.75% (4.884% to 5.884% at June 30, 2001), matures in December 2003, and is guaranteed by Steamer Holding AB, Hudson RCI AB's parent, and is secured by the common stock of Hudson RCI AB. The Company has issued to Holding 300,000 shares of its 11-1/2% Senior Exchangeable PIK Preferred Stock due 2010 with an initial aggregate liquidation preference of $30.0 million, which has terms and provisions materially similar to those of the 11-1/2% Senior Exchangeable PIK Preferred Stock due 2010 issued by Holding. At the election of the Company, dividends may be paid in kind until April 15, 2003 and thereafter must be paid in cash. As the result of a number of factors affecting the Company in fiscal 2000, management has taken numerous actions during 2001 including elimination of a distribution warehouse, elimination of non-essential management personnel, reduction in inventory levels, aggressive collection efforts of accounts receivable and other cost reduction measures as management deemed necessary to fund the operations of the Company, meet anticipated capital expenditures and make required payments of principal and interest on its debt, including payments due on the Subordinated Notes and obligations under the Credit Facility. Management does not believe the restructuring charges referred to above will be material to the Company. In addition, existing shareholders and key management personnel contributed and will contribute approximately $15.1 million in the form of convertible subordinated debt and equity in April, May and August of 2001 and will contribute an additional $3.0 million in redeemable preferred stock of Holding (which Holding will invest in preferred stock of the Company) in August of 2001, in order to improve the Company's liquidity position. Based on these actions, as well as anticipated improved operating performance, management believes it will have sufficient sources of liquidity to meet its obligations for a period of at least 18 months. 20 Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, effective for fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments. The statement requires that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value, and that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The impact of adoption was not be material to the financial statements. During the second quarter of fiscal year 2000, Emerging Issues Task Force (EITF) No. 00-10 "Accounting for Shipping and Handling Fees and Costs" was issued. EITF No. 00-10 clarifies the accounting treatment and classification of the Company's delivery revenues and expenses. The adoption of this EITF only affects the classification of certain revenues and costs related to delivery services and does not affect the Company's net income (loss). Delivery costs include direct and incremental costs incurred to warehouse and move product to the Company's customers. Since the Company records freight costs associated with delivery of product to customers as a component of cost of sales and warehousing costs as distribution expenses, management believes they already comply with this pronouncement. During December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 summarizes certain of the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Management believes the Company is in compliance with this pronouncement. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"). This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No. 16, "Business Combinations," and FASB Statement No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises." All business combinations in the scope of this Statement are to be accounted for using one method, the purchase method. The Company will adopt SFAS 141 for all business combinations initiated after June 30, 2001. Also in June 2001, the FASB issued Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). SFAS 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, "Intangible Assets." This pronouncement addresses, among other things, how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Goodwill would no longer be amortized but would be assessed at least annually for impairment using a fair value methodology. The Company will adopt this statement for all goodwill and other intangible assets acquired after June 30, 2001 and for all existing goodwill and other intangible assets beginning January 1, 2002. Upon adoption of this standard on January 1, 2002 the Company will cease recording amortization of goodwill which would increase net income in 2002 by approximately $2.8 million, net of income taxes. Other than ceasing the amortization of goodwill, the Company does not anticipate that the adoption of SFAS 142 will have a significant effect on our financial position or the results of our operations as the Company does not currently anticipate any impairment charges for existing goodwill. 21 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 4.3 Form of Senior Subordinated Convertible Promissory Note Due 2005. 4.4 Certificate of Determination of Preferences of 12% Junior Convertible Cumulative Preferred Stock of the Company. 10.19 Subordination Agreement dated as of April 17, 2001 among the Company, FS Equity partners IV, L.P., Bankers Trust Company and the Subordinated Creditors party thereto. 10.20 Amendment No. 5 to and Limited Waiver of Certain Provisions of the Credit Agreement dated as of July 30, 2001 among the Company, Holding and the lenders party thereto. (b) Reports on Form 8-K None. 22 SIGNATURE Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUDSON RESPIRATORY CARE INC., a California corporation September 14, 2001 By: /s/ Patrick G. Yount ------------ -------------------- Patrick G. Yount Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) EX-4.3 3 dex43.txt FORM OF SENIOR SUBORDINATED CONVERTIBLE NOTE Exhibit 4.3 THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE STATE SECURITIES LAWS. THIS NOTE IS SUBJECT TO A SUBORDINATION AGREEMENT IN FAVOR OF BANKERS TRUST COMPANY, AS ADMINISTRATIVE AGENT FOR THE LENDERS FROM TIME TO TIME PARTY TO THE CREDIT AGREEMENT (AS SUCH TERMS ARE DEFINED IN SUCH SUBORDINATION AGREEMENT) DATED AS OF APRIL 17, 2001 (THE "SUBORDINATION AGREEMENT"). $ _____________ Temecula, California ______________, 2001 SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE DUE 2005 Hudson Respiratory Care Inc., a California corporation (the "Maker"), for ----- value received, promises to pay to _______________________ (the "Holder") the ------ principal sum of __________ _______________________ Dollars and No Cents ($_________) on March 31, 2005 (the "Maturity Date") as provided herein. The ------------- Maker also promises to pay interest from the date of this Note until payment in full on the unpaid principal balance as set forth in Section 1 below. --------- 1. Payment of Interest. ------------------- (a) The interest rate payable hereunder shall be 10% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. At the option of the Maker, interest may (i) be paid semi-annually on each April 15 and October 15, beginning on October 15, 2001 (each such semi- annual date that an interest payment is due, an "Interest Payment Date") but --------------------- only through the issuance on any Interest Payment Date of an additional promissory note of equal ranking to this Note and on the same terms and conditions provided for herein, such note to be issued in a principal amount that corresponds with the amount of the interest payment that would otherwise be due on such Interest Payment Date or (ii) accrue, such accruing amount to be compounded semi-annually commencing with the first six month anniversary of the initial Interest Payment Date on which such interest is due and continuing until paid. In addition, all accrued and unpaid interest on this Note will be due and payable on the day that all principal is due and payable, whether on the Maturity Date, by acceleration or otherwise. (b) Payment shall be made in lawful tender of the United States in immediately available funds, and shall be credited, prior to the occurrence of an Event of Default (as defined below), first to accrued interest then due and payable with the remainder applied to principal. Prepayment of the principal, in whole or in part together with accrued interest, may be made at any time without penalty or premium. 2. Subordination; Ranking. ---------------------- (a) This Note and all principal, interest and other amounts, if any, payable hereunder shall be subject to the Subordination Agreement and is subordinated in right of payment to the extent and in the manner provided in the Subordination Agreement. No indebtedness which does not constitute Senior Debt shall be senior in any respect to this Note. For purposes of this Note, "Senior ------ Debt" shall mean the "Senior Debt" as defined in the Subordination Agreement. - ---- (b) This Note and all principal, interest and other amounts, if any, payable hereunder shall in all respects rank pari passu in right of payment with the Maker's 9 1/8% Senior Subordinated Notes due 2008 and shall constitute "Senior Subordinated Debt" as defined for purposes thereof. 3. Conversion. ---------- (a) At the option of the Holder, this Note shall be convertible into a number of shares of common stock, no par value per share, of the Maker ("Common ------ Stock"), calculated by dividing the principal amount of this Note by $10.00 (the - ----- "Conversion Price"), as such Conversion Price is subject to adjustment as set ---------------- forth in subsections (d) through (f) below. In addition, this Note shall automatically convert into Common Stock, calculated according to the provisions of this subsection (a), upon the affirmative vote of the holders of an aggregate principal amount representing a majority of the then outstanding principal amount of all Notes. (b) In connection with any conversion of this Note, all interest accrued and compounded pursuant to Section 1(a)(ii) of this Note, or paid ---------------- through the issuance of additional Notes pursuant to Section 1(a)(i) of this ----------------------- Note shall, at the option of the Maker, (1) be convertible into Common Stock - ---- based upon the terms of this Section 3, (2) be paid in cash or (3) be paid by --------- the issuance of an additional promissory note or notes of equal ranking to this Note and on the same terms and conditions provided for herein, such note to be issued in a principal amount that corresponds with the amount of the interest payment that would otherwise be due upon conversion of this Note (the "Additional Note"); provided, however, that if at the time of the requested - ---------------- -------- ------- conversion of this Note, the Maker is unable to issue Common Stock to the Holder, pay such interest in cash or issue an Additional Note because the terms of any agreement to which the Maker or its parent is a party, including the Credit Agreement and the Subordination Agreement, prohibits all of the same, then this Note shall not be converted into Common Stock at such time. 2 (c) As soon as practicable after the conversion of this Note, the Maker at its expense will cause to be issued in the name of and delivered to the Holder, a certificate or certificates for the number of shares of Common Stock to which the Holder shall be entitled on such conversion. No fractional shares will be issued on conversion of the Note. If on conversion of the Note a fraction of a share results, the Company will pay the cash value of that fractional share based on the Conversion Price then in effect. (d) In the event the outstanding shares of Common Stock shall, after date hereof, be further subdivided (split), or combined (reverse split), by reclassification or otherwise, or in the event of any dividend or other distribution payable on the Common Stock in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, dividend or other distribution shall, concurrently with the effectiveness of such subdivision, combination or dividend or other distribution, be proportionately adjusted. (e) If the Maker at any time shall issue additional shares of Common Stock, by reason of the declaration or payment of a dividend or other distribution on the Common Stock payable in additional shares of Common Stock, then and in each such event, the Conversion Price then in effect shall be decreased as of the time of such issuance or, if such a record date shall have been fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction: (i) the numerator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which shall be the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date shall have been fixed and such dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this subsection as of the time of actual payment of such dividends or distributions. (f) (i) If at any time or from time to time after the date hereof, the Maker issues or sells, or is deemed by the express provisions of this subparagraph (f) to have issued or sold, Additional Shares of Common Stock (as defined in clause (v) below), other than upon a subdivision or combination of, or as a dividend or other distribution on, the Common Stock as provided in subparagraph (e) above, for an Effective Price (as defined in clause (v) below) less than the then existing Conversion Price (or, if an adjusted Conversion Price shall be in effect by reason of a previous adjustment, then less than such adjusted Conversion Price), the then-existing Conversion Price shall be reduced, as of the opening of business on the date of such issue or sale, 3 to a price determined by multiplying the then-existing Conversion Price by a fraction (i) the numerator of which shall be (A) the number of shares of Common Stock outstanding at the close of business on the day immediately preceding the date of such issue or sale, plus (B) the number of shares of Common Stock that the aggregate consideration received (or by the express provisions hereof deemed to have been received) by the Maker for the total number of Additional Shares of Common Stock so issued would purchase at the Conversion Price in effect immediately prior to such issuance, and (ii) the denominator of which shall be the number of shares of Common Stock outstanding immediately prior to such issuance plus the number of Additional Shares of Common Stock so issued; provided, however, that for the purposes of this clause (i), all shares of Common Stock then issuable upon conversion or exercise of then outstanding rights or options to acquire Common Stock or other stocks or securities convertible into Common Stock shall be deemed to be outstanding. (ii) For the purpose of making any adjustment required under this subparagraph (f), the consideration received by the Maker for any issue or sale of securities shall (A) to the extent it consists of cash be computed at the gross amount of cash received by the Maker before deducting any expenses payable by the Maker and any underwriting or similar commissions, compensation, or concessions paid or allowed by the Maker in connection with such issue or sale, (B) to the extent it consists of property, be computed as determined in good faith by the Board of Directors of the Maker (the "Board"), and (C) if ----- Additional Shares of Common Stock, securities convertible into Additional Shares of Common Stock ("Convertible Securities") or rights or options to purchase ---------------------- either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Maker for a consideration which covers both, be computed as the portion of the consideration so received that may be reasonably determined in good faith by the Board to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options, as the case may be. (iii) For the purpose of the adjustment required under this subparagraph (g), if the Maker issues or sells any rights or options to purchase Common Stock or any Convertible Securities and if the Effective Price of the Additional Shares of Common Stock underlying such rights or options or Convertible Securities is less than the then applicable Conversion Price, then the Maker shall be deemed to have issued at the time of the issuance of such rights or options or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received as consideration for the issuance of such shares an amount equal to the total amount of the consideration, if any, received by the Maker for the issuance of such rights or options or Convertible Securities, plus, in the case of such rights or options, the minimum amount of consideration, if any, payable to the Maker upon the exercise of such rights or options, plus, in the case of Convertible Securities, the minimum amounts of consideration, if any, payable to the Maker (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion thereof. No further adjustment of the Conversion Price, adjusted upon the issuance of such rights, options or Convertible Securities, shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such rights, 4 options or the conversion of any such Convertible Securities. If any such rights or options or the conversion privilege represented by any such Convertible Securities shall expire without having been exercised, the Conversion Price, adjusted upon the issuance of such rights, options or Convertible Securities shall be readjusted to the applicable Conversion Price that would have been in effect had an adjustment been made on the basis that the only Additional Shares of Common Stock so issued were the Additional Shares of Common Stock, if any, actually issued or sold on the exercise of such rights or options or rights of conversion of such Convertible Securities, and such Additional Shares of Common Stock, if any, were issued or sold for the consideration actually received by the Maker upon such exercise, plus the consideration, if any, actually received by the Maker for the granting of all such rights or options, whether or not exercised, plus the consideration received for issuing or selling the Convertible Securities actually converted, plus the consideration, if any, actually received by the Maker (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) on the conversion of such Convertible Securities. (iv) For the purpose of the adjustment required under this subparagraph (g), if the Maker issues or sells any rights or options for the purchase of Convertible Securities and if the Effective Price of the Additional Shares of Common Stock underlying such Convertible Securities is less than the then-applicable Conversion Price, the Maker shall be deemed to have issued at the time of the issuance of such rights or options the maximum number of Additional Shares of Common Stock issuable upon conversion of the total amount of Convertible Securities covered by such rights or options and to have received as consideration for the issuance of such Additional Shares of Common Stock an amount equal to the amount of consideration, if any, received by the Maker for the issuance of such rights or options, plus the minimum amounts of consideration, if any, payable to the Maker upon the exercise of such rights or options and plus the minimum amount of consideration, if any, payable to the Maker (other than by cancellation of liabilities or obligations evidenced by such Convertible Securities) upon the conversion of such Convertible Securities. No further adjustment of the Conversion Price, adjusted upon the issuance of such rights or options, shall be made as a result of the actual issuance of the Convertible Securities upon the exercise of such rights or options or upon the actual issuance of Additional Shares of Common Stock upon the conversion of such Convertible Securities. The provisions of clause (iii) above for the readjustment of the Conversion Price upon the expiration of rights or options or the rights of conversion of Convertible Securities shall apply, the necessary changes having been made, to the rights, options and Convertible Securities referred to in this clause (iv). (v) "Additional Shares of Common Stock" shall mean all shares of --------------------------------- Common Stock issued by the Maker after the date hereof, whether or not subsequently reacquired or retired by the Maker, other than shares of Common Stock issued (A) upon conversion of any of the Notes; (B) to employees or directors of or consultants providing bona fide consulting services to the Maker or any subsidiary pursuant to any stock purchase or stock option plans or other arrangements that are approved by the Board; (C) upon exercise or conversion, as applicable, of options, warrants, notes or other rights to acquire securities of the Company outstanding on the date of this Note; (D) upon exercise of warrants to purchase Common Stock 5 issued to lenders, real or personal property lessors, vendors, customers, potential or existing strategic partners, trade partners or service providers in connection with commercial credit arrangements, real or personal property leases, equipment financings, strategic alliances or similar transactions; (E) in connection with any stock split or stock dividend of the Maker; or (F) pursuant to the Maker's acquisition of another corporation or all or a portion of such corporation's assets by merger, purchase of assets or other corporate reorganization, in each case if unanimously approved by the Board. (vi) The "Effective Price" of Additional Shares of Common Stock --------------- shall mean the quotient determined by dividing the total number of Additional Shares of Common Stock issued or sold, or deemed to have been issued or sold by the Maker under this subparagraph (f), into the aggregate consideration received, or deemed to have been received by the Maker for such issue under this subparagraph (f), for such Additional Shares of Common Stock. (g) Upon the occurrence of each adjustment or readjustment of a Conversion Price, the Maker at its expense shall promptly compute such adjustment or readjustment in accordance with the terms hereof and furnish to the Holder a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Maker shall, upon the written request, at any time, of any Creditor, furnish or cause to be furnished to such holder a like certificate setting forth: (i) such adjustments and readjustments; (ii) the applicable Conversion Price at the time in effect; and (iii) the number of shares of Common Stock and the amount, if any, of other property which at the time would be received upon the conversion of the Note. 4. Events of Default. If any of the following events (each, an "Event of ----------------- -------- Default") shall occur: - ------- (a) the Maker shall fail to make any payment hereunder when due and payable, and such failure shall continue unremedied for a period of ten (10) days after notice thereof from the Holder to the Maker; or (b) the Maker shall fail to make any payment under any indebtedness of the Maker that is outstanding in an aggregate principal amount of at least $15,000,000, including, without limitation, indebtedness of the Maker under the Credit Agreement, when the same becomes due and payable, and such failure shall continue after the applicable grace period, if any, specified in the agreement or instrument evidencing such indebtedness, either (i) when and as the same becomes due and payable at the stated maturity of such indebtedness or (ii) at any other time if, as a result of such nonpayment, the maturity of such indebtedness is accelerated; or (c) the Maker shall generally fail to pay, or admit in writing its inability to pay, its debts as they become due, or shall voluntarily commence any proceeding or file any petition under any bankruptcy, insolvency or similar federal, state or foreign law or seeking dissolution, liquidation or reorganization or the appointment of a receiver, trustee, custodian or liquidator for 6 it or a substantial portion of its property, assets or business or to effect a plan or other arrangement with its creditors, or shall file any answer admitting the jurisdiction of the court and the material allegations of an involuntary petition filed against it in any bankruptcy, insolvency or similar proceeding, or shall be adjudicated bankrupt, or shall make a general assignment for the benefit of creditors, or shall consent to, or acquiesce in the appointment of, a receiver, trustee, custodian or liquidator for a substantial portion of its property, assets or business, or shall by any act or failure to act indicate its consent to or approval of any of the foregoing, or if any corporate action is taken by the Maker for the purpose of effecting any of the foregoing; or (d) involuntary proceedings or an involuntary petition shall be commenced or filed against the Maker under any bankruptcy, insolvency or similar federal, state or foreign law or seeking the dissolution, liquidation or reorganization of it or the appointment of a receiver, trustee, custodian or liquidator for it or of a substantial part of its property, assets or business, and such proceedings or petition shall not be dismissed within 60 days; or any writ, judgment, tax lien, warrant of attachment, execution or similar process shall be issued or levied against a substantial part of its property, assets or business, and such writ, judgment, lien, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded, within 60 days after commencement, filing or levy, as the case may be, or any order for relief shall be entered in any such proceeding; or any winding-up, dissolution, liquidation or reorganization of the Maker; then, and in every such event, and at any time thereafter during the continuance of such event, but in all cases subject to the provisions of the Subordination Agreement, (i) in the case of an Event of Default under clauses (a) and (b), the Holders of a majority of the outstanding principal amount of all Notes may declare all principal and accrued interest and all other fees and other obligations of the Maker under the Notes to be due and payable, and (ii) in the case of an Event of Default under clauses (c) or (d), all principal and accrued interest on all outstanding Notes and all fees and other obligations of the Maker under the Notes will be immediately due and payable on all outstanding Notes without any declaration or other act on the part of the Holders, in either case without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Maker, except the notice provided for in clause (a) above. 5. Security. This Note is not secured. -------- 6. Series of Notes; Actions by Majority. This Note is one of a series of ------------------------------------ Notes of like tenor issued in an original aggregate principal amount of up to $10,500,000. When actions are specified herein as happening upon the decision of holders of a majority in principal amount of the Notes, such action shall be evidenced by a writing executed by such Holders and delivered to all Holders of Notes and shall be the act of and binding on all Holders. 7. Costs and Expenses. The Maker promises to pay all costs and expenses, ------------------ including reasonable attorneys' fees, incurred by the Holder in connection with the enforcement of, or collection of any amounts due under, this Note. The Maker hereby 7 waives notice of default, presentment or demand for payment, protest or notice of nonpayment or dishonor and all other notices or demands relative to this instrument, except for notices to which the Maker is expressly entitled under this Note or the Note Agreement. 8. Successors and Assigns. This Note shall be binding upon, and shall ---------------------- inure to the benefit of, the Maker and the Holder and their respective successors and assigns; provided, however, that neither this Note nor any of the rights, interests or obligations hereunder may be assigned, by operation of law or otherwise, in whole or in part, by the Maker without the prior written consent of the Holder except in connection with an assignment in whole to a successor Maker to the Maker in a merger of the Maker or a sale of all or substantially all of the Maker's property and assets and then only if the Holder's rights hereunder are not impaired. 9. Modifications and Amendments; Reissuance of Note. This Note may only ------------------------------------------------ be modified, amended, or terminated (other than by payment in full) by an agreement in writing signed by the Maker and the Holders of a majority in principal amount of all Notes. No waiver of any term, covenant or provision of this Note shall be effective unless given in writing by the Holders of a majority in principal amount of all Notes. Upon receipt of evidence reasonably satisfactory to the Maker of the loss, theft, destruction, or mutilation of this Note and of an agreement of indemnity reasonably satisfactory to the Maker, and upon surrender or cancellation of this Note, if mutilated, the Maker will make and deliver a new Note of like tenor in lieu of such lost, stolen, destroyed, or mutilated Note. 10. Remedies Cumulative. Each and every right, power and remedy herein ------------------- given to the Holder, or otherwise existing, shall be cumulative and not exclusive and be in addition to all other rights, powers and remedies now or hereafter granted (including, without limitation, other rights of set-off under applicable law) or otherwise existing. Each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and as often and in such order as may be deemed expedient by the Holder. 11. Notices. All notices and other communications required or permitted ------- hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, or otherwise delivered by facsimile, hand or by messenger (which may be by overnight delivery service), addressed (a) if to the Maker, at the address and facsimile number set forth on the signature page to this Note or at such other address and facsimile number as the Maker shall have furnished to the Holder by first class mail, or (b) if to the Holder, to 11100 Santa Monica Blvd., Suite 1900, Los Angeles, CA 90025, or at such other address and facsimile number as the Holder shall have furnished to the Maker by first class mail. 12. Waiver. The Holder shall not by any act (except by a written ------ instrument in accordance with the immediately preceding paragraph), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any default or Event of Default or in any breach of any of the terms and conditions hereof. No failure to 8 exercise, nor any delay in exercising, on the part of the Holder, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Holder of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Holder would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any rights or remedies provided by law. 13. JURISDICTION. ALL LEGAL ACTIONS OR PROCEEDINGS BROUGHT AGAINST THE ------------ MAKER WITH RESPECT TO THIS NOTE MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE STATE OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS NOTE THE MAKER ACCEPTS FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, THE JURISDICTION OF THE AFORESAID COURTS. THE MAKER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES ANY CLAIM OR DEFENSE IN ANY SUCH ACTION OR PROCEEDING BASED ON ANY ALLEGED LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR FORUM NON CONVENIENS OR ANY SIMILAR BASIS. THE MAKER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF ANY COMPLAINT, SUMMONS, NOTICE OR OTHER PROCESS RELATING TO ANY LEGAL ACTION OR PROCEEDING BY DELIVERY THEREOF TO IT BY HAND OR BY MAIL TO THE ADDRESS OF THE MAKER SET FORTH ABOVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF A HOLDER TO BRING PROCEEDINGS AGAINST THE MAKER IN THE COURTS OF ANY OTHER JURISDICTION OR TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. 14. Governing Law. This Note shall be construed in accordance with the ------------- laws of the State of California, without regard to the conflicts of law provisions of the State of California or of any other state. 15. Interest. The rate of interest payable under this Note shall in no -------- event exceed the maximum rate permissible under applicable law. If the rate of interest payable on this Note is ever reduced as a result of this paragraph and at any time thereafter the maximum rate permitted under applicable law exceeds the rate of interest provided for in this Note, then the rate provided for in this Note shall be increased to the maximum rate provided for under applicable law for such period as is required so that the total amount of interest received by the Holder is that which would have been received by the Holder but for the operation of the first sentence of this paragraph. 9 IN WITNESS WHEREOF, the Maker has caused this Note to be signed on the date first set forth above. MAKER: HUDSON RESPIRATORY CARE INC. By: ___________________________ Name: Patrick Yount Title: Chief Financial Officer Notice Address: 27111 Diaz Road P.O. Box 9020 Temecula, California 92589-9020 Facsimile: (909) 676-1578 SIGNATURE PAGE TO SENIOR SUBORDINATED CONVERTIBLE PROMISSORY NOTE DUE 2005 10 EX-4.4 4 dex44.txt CERTIFICATE OF DETERMINATION EXHIBIT 4.4 CERTIFICATE OF DETERMINATION OF PREFERENCES OF 12% JUNIOR CONVERTIBLE CUMULATIVE PREFERRED STOCK OF HUDSON RESPIRATORY CARE INC. a California corporation The undersigned certify that: A. They are the President and Secretary, respectively , of Hudson Respiratory Care Inc., a California corporation (the "Company"). B. The authorized number of shares of Preferred Stock is 2,000,000 of which 397,694 shares have been issued. The authorized number of shares of 12% Junior Convertible Cumulative Preferred Stock is 10,000 shares, none of which has been issued. C. Pursuant to the authority given by the Company's Amended and Restated Articles of Incorporation, the Board of Directors of the Corporation (the "Board") duly has approved and adopted the following recitals and resolutions: WHEREAS, the Articles of Incorporation of the Company authorize the Board of Directors to determine the designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidation preference, of any series of Preferred Stock, and to fix the number of shares constituting any such series, and to increase or decrease the number of shares of any such series. NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish a series of Preferred Stock as follows: (a) The designation of such series of Preferred Stock is the 12% Junior Convertible Cumulative Preferred Stock (the "Junior Preferred Stock"), and the number of shares of such Junior Preferred Stock is 10,000; (b) The designations and powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including without limitation, the dividend rate, conversion rights, redemption price and liquidations preference granted to and imposed upon Junior Preferred Stock and the holders thereof (the "Holders") shall be as set forth below: (c) Ranking. The Junior Preferred Stock will, with respect to dividend ------- rights and rights on liquidations, winding-up and dissolutions, rank (i) senior to common stock of the Company (the "Common Stock") and to each other series of Preferred Stock established hereafter by the Board of Directors the terms of which do not expressly provide that it ranks senior to, or on parity with, the Junior Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company, (ii) junior to the 112% Senior PIK Preferred Stock due 2010 (the "Senior PIK Preferred Stock") as to dividend rights and rights on liquidation, winding-up and dissolution of the Company, and (iii) on a parity with each other series of Preferred Stock established hereafter by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Junior Preferred as to dividend rights and right on liquidation, winding-up and dissolutions (collectively referred to as "Parity Stock"). (d) Dividends. --------- (i) The holders of shares of Junior Preferred Stock then outstanding shall be entitled to receive, prior to any payment or declaration of dividends in respect of the outstanding Common Stock or any other capital stock of the Company (other than the Senior Preferred Stock or Parity Stock), when and if declared by the Board, out of funds legally available for the payment of dividends, cumulative dividends at the rate of (a) $120 per share plus (b) an amount determined by applying a 12% annual rate compounded semi-annually to any accrued but unpaid dividend amount from the last day of the period when such dividend accrues to the actual date of payment of such dividend. Such dividends on the outstanding shares of Junior Preferred Stock shall be payable on each April 15 and October 15 (each such date being a "Dividend Payment Date"). The Board may fix a record date for the determination of holders of shares of Junior Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. Each of such semi-annual dividends (whether payable in cash or in stock) shall be fully cumulative and shall accrue from day to day (whether or not declared) from the first day of each period in which such dividend may be payable as herein provided, except that with respect to the first semi-annual dividend, such dividend shall accrue from the date of issuance of the Junior Preferred Stock. Dividends, when, as permitted by the debt agreements of the Company or any of its Subsidiaries, or, at the Company's option, by issuing shares, of Junior Preferred Stock shall constitute full payment of the Dividend. (ii) All dividends paid with respect to shares of the Junior Preferred Stock pursuant to this paragraph (d) shall be paid pro rata to the Holders entitled thereto. (iii) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on the Junior Preferred Stock for any period unless full cumulative dividends with respect to each Dividend Payment Date ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Senior PIK Preferred Stock. If full dividends are not so paid, the Parity Stock will share dividends pro rata with the Junior Preferred Stock. 2 (iv) No dividend whatsoever may be declared or paid upon, or any sum set apart for the payment of dividends upon, any outstanding share of the Junior Preferred Stock with respect to any Dividend Period unless all dividends for all preceding Dividend Periods have been declared and paid or declared and, if payable in cash, a sufficient sum in cash set apart for the payment of such dividend, upon all outstanding shares of Junior Preferred Stock. (v) No full dividends may be declared or paid or funds set apart for the payment of dividends by the Company on any Parity Stock for any period unless full cumulative dividends in respect of each Dividend Period ending on or before such period shall have been or contemporaneously are declared and paid in full or declared and, if payable in cash, a sufficient sum in cash set apart for such payment on the Junior Preferred Stock. If full dividends are not so paid, the Junior Preferred Stock will share dividends pro rata with the Parity Stock. (vi) The Company will not (A) declare, pay or set apart funds for the payment of any dividend or other distribution with respect to any Junior Stock or (B) repurchase, redeem or otherwise retire any Junior Stock or Parity Stock, nor may funds be set apart for payment with respect thereto, unless all accrued and unpaid dividends with respect to the Junior Preferred Stock at the time such dividends are payable have been paid or funds have been set apart for payment of such dividends, if payable in cash. As used herein, the term "dividend" does not include dividends payable solely in shares of Junior Stock on Junior Stock. (vii) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, to holders of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors of the Company. (viii) Dividends payable on the Junior Preferred Stock for any period other than a Dividend Period shall be computed on the basis of a 360-day year comprised of twelve 30-day months and the actual number of days elapsed in the period for which payable and will be deemed to accrue on a daily basis. Dividends payable on the Junior Preferred Stock for a full Dividend Period will be computed by dividing the per annum dividend rate by two. (e) Liquidation Preference. Upon any voluntary or involuntary ---------------------- liquidation, dissolution or winding-up of the Company, each Holder of Junior Preferred Stock will be entitled to be paid, out of the assets of the Company available for distribution to its shareholders, an amount (the "Liquidation Preference") equal to the sum of (i) $1,000 per share of Junior Preferred Stock held by such Holder plus (ii) an amount in cash equal to all accumulated and unpaid dividends (whether or not declared, and including any accrual amounts thereon as provided in subsection (d)(i) above) thereon to the date fixed for liquidation, dissolution or winding-up before any distribution is made on any Junior Stock, including, without limitation, common stock of the Company. All assets or surplus funds of the Company available for distribution to its shareholders, whether such assets are capital, surplus or earnings, shall be distributed in the following order of priority: 3 (i) First, ratably among the holders of the Senior PIK Preferred ----- Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Senior PIK Preferred Stock, if amounts payable thereon had been paid in full); (ii) Second, ratably among the holders of the Junior Preferred Stock ------ and the Parity Stock (in proportion to the full liquidation preference and accumulated and unpaid dividends that would be payable on such shares of Junior Preferred Stock and the Parity Stock, respectively, if all amounts payable thereon had been paid in full) in any distribution of assets of the Company to which each is entitled. (iii) Third, ratably among the holders of the Junior Stock. ----- After payment of the full amount of the Liquidation Preference of the outstanding shares of Junior Preferred Stock (plus all accumulated and unpaid dividends), the holders of shares of Junior Preferred Stock will not be entitled to any further participation in any distribution of assets of the Company. For the purposes of this paragraph (e), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more other entities shall be deemed to be a liquidation, dissolution or winding-up of the Company. (f) Optional Redemption. ------------------- (i) Each share of the Junior Preferred Stock may be redeemed at any time or from time to time, in whole or in part, at the option of the Company at the redemption price of the 100% of the Liquidation Preference of such share (the "Redemption Price"). (ii) In the event of a redemption of only a portion of the then outstanding shares of Junior Preferred Stock, the Company shall effect such redemption on a pro rata basis, except that the Company may redeem all of the shares held by Holders of fewer than 100 shares (or all of the shares held by Holders who would hold lower than 100 shares as a result of such redemption), as may be determined by the Company. (iii) Procedure for Optional Redemption. --------------------------------- (A) On and after the Optional Redemption Date (the "Redemption Date"), unless the Company defaults in the payment of the applicable redemption price, dividends will cease to accumulate on shares of Junior Preferred Stock called for redemption and all rights of Holders of such shares will terminate except for the right to receive the Optional Redemption Price, without interest; provided, however, that if a notice of redemption shall have been given as - -------- ------- provided in 4 subparagraph (iii)(B) and the funds necessary for redemption (including an amount in respect of all dividends that will accrue to the Redemption Date) shall have been segregated and irrevocably set apart by the Company, in trust for the benefit of the Holders of the shares called for redemption, then dividends shall cease to accumulate on the Redemption Date on the shares to be redeemed and, at the close of business on the day on which such funds are segregated and set apart, the Holders of the shares to be redeemed shall, with respect to the shares to be redeemed, cease to be Stockholders of the Company and shall be entitled only to receive the Optional Redemption Price, for such shares without interest from the Redemption Date. (B) With respect to a redemption, the Company will send a written notice of redemption by first class mail to each holder of record of shares of Junior Preferred Stock, not fewer than 30 days nor more than 60 days prior to the Redemption Date at its registered address (the "Redemption Notice") and notice, if mailed in the manner herein provided, shall conclusively be presumed to have been given, whether or not the Holder receives such notice; provided, -------- however, that no failure to give such notice nor any deficiency therein shall - ------- affect the validity of the procedure for the redemption of any shares of Junior Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) the Optional Redemption Price; (2) whether all or less than all the outstanding shares of Junior Preferred Stock are to be redeemed and the total number of shares of Junior Preferred Stock being redeemed; (3) the Redemption Date; (4) that the Holder is to surrender to the Company, in the manner, at the place or places and at the price designated, his certificate or certificates representing the shares of Junior Preferred Stock to be redeemed; and (5) that dividends on the shares of the Junior Preferred Stock to be redeemed shall cease to accumulate on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price. (C) Each Holder of Junior Preferred Stock shall surrender the certificate or certificates representing such shares of Junior Preferred Stock to the Company, duly endorsed (or otherwise in proper form for transfer, as determined by the Company), in the manner and at the place designated in the Redemption Notice, and on 5 the Redemption Date the full Optional Redemption Price, for such shares shall be payable in cash to the person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (g) Voting Rights. ------------- (i) The Holders of Junior Preferred Stock, in addition to any other voting rights required under California law, shall be entitled, subject to paragraph (g)(ii)(A), to cast a one-half vote per share on matters required or permitted to be voted upon by the shareholders of the Company, and the Junior Preferred Stock shall vote together with the Company's common stock ("Common Stock") as a single class on all such matters. Further, the Holders of the Junior Preferred Stock, voting as a separate class, shall have the voting rights set forth in paragraph (g)(ii). (ii) (A) So long as any shares of Junior Preferred Stock are outstanding, the Company will not authorize, create or increase the authorized amount of any class or series of Capital Stock or Preferred Stock, the terms of which expressly provide that such class or series will rank senior to the Junior Preferred Stock as to dividend rights and rights upon liquidation, winding-up and dissolution of the Company (collectively referred to as "Senior Stock") or Parity Stock without the affirmative vote or consent of Holders of at least two- thirds of the shares of Junior Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting. (B) So long as any shares of the Junior Preferred Stock are outstanding, the Company will not amend this Certificate of Determination so as to affect adversely the specified rights, preferences, privileges or voting rights of Holders of shares of Junior Preferred Stock or to authorize the issuance of any additional shares of Junior Preferred Stock (except to authorize the issuance of additional shares of Junior Preferred Stock to be paid as dividends on the Junior Preferred Stock, for which no consent shall be necessary) without the affirmative vote or consent of Holders of at least a majority of the issued and then outstanding shares of Junior Preferred Stock, voting or consenting, as the case may be, as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting; provided that this paragraph shall not prohibit the merger of the -------- Company and a Wholly Owned Subsidiary of the Company or the Company incorporated in another state of the United States solely for the purpose of reincorporating the Company to the extent that the surviving corporation issues to the Company shares of a series of Preferred Stock having an aggregate liquidation preference equal to the Liquidation Preference of the Junior Preferred Stock outstanding immediately prior to such merger and terms and provisions substantially similar to those of the Junior Preferred Stock. (C) Except as required under California law or as set forth in paragraph (g)(ii)(A) or (B) above, (x) the creation, authorization or issuance of any shares of any Junior 6 Stock, Parity Stock or Senior Stock, including the designation of a series thereof within the existing class of Junior Preferred Stock, or (y) the increase or decrease in the amount of authorized capital stock of any class, including any Junior Preferred Stock, shall not require the consent of Holders of Junior Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of shares of Junior Preferred Stock. (h) Conversion or Exchange. ---------------------- (i) Optional Conversion. Each share of Junior Preferred Stock shall ------------------- be convertible, without the payment of any additional consideration by the Holder thereof and at the option of the Holder thereof, at any time after the date of issuance of such share, at the office of the Company into such number of fully paid and nonassessable shares of Common Stock as determined by dividing $1,000 (the "Original Purchase Price") by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also receive in respect of each share converted all accrued and unpaid dividends on such share payable at the election of the Holder, either (1) in a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) in cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock. The initial Conversion Price at which shares of Common Stock shall be deliverable upon conversion(the "Conversion Price") shall be $10 per share. Such Conversion Price shall be subject to adjustment as provided in section (h)(vi) below. (ii) Automatic Conversion. Each share of Junior Preferred Stock -------------------- shall automatically be converted into that number of shares of Common Stock as determined by dividing $1,000 (the "Original Purchase Price") by the Conversion Price in effect at the time of conversion. In addition, each Holder of Junior Preferred Stock shall also received for accrued and unpaid dividends on each share, subject to the election of the Holder, either (1) a number of additional shares of Common Stock obtained by dividing the amount of accrued and unpaid dividends on each share of Junior Preferred Stock by the Conversion Price in effect at the time of the conversion or (2) cash in the amount of such accrued and unpaid dividends on such share of Junior Preferred Stock upon the closing of a firm commitment underwritten public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, covering the offer and sale of the Company's Common Stock. (B) Additionally, each share series of Junior Preferred Stock shall be automatically converted into shares of Common Stock at the Conversion Price in effect at the time of conversion upon the optional conversion into Common Stock of a cumulative number of shares of Junior Preferred Stock representing two thirds of the aggregate number of shares of Junior Preferred Stock theretofore issued by the Company. (iii) Fractional Shares. No fractional shares of Common Stock shall ----------------- be issued upon conversion of the Junior Preferred Stock. In lieu of any fractional shares to which the 7 holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by the Conversion Price. (iv) Mechanics of Optional Conversion. Before any holder of Junior -------------------------------- Preferred Stock shall be entitled to convert the same into full shares of Common Stock, such Holder shall surrender the certificate or certificates therefor, endorsed or accompanied by written instrument or instruments of transfer, in a form satisfactory to the Company, duly executed by the registered Holder or by such Holder's his or its attorney duly authorized in writing, at the office of the Company, and shall give written notice to the Company at such office that such holder elects to convert the same and shall state therein such Holder's name or the names of the nominees in which such Holder wishers the certificate or certificates for shares of Common Stock to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Junior Preferred Stock, or to his or its nominee or nominees, a certificate or certificates for the number of shares of Common stock to which such holder shall be entitled as aforesaid, together with cash in lieu of any fraction of a share. Such conversion shall be deemed to have been made immediately prior to the close of business on the date of such surrender of the shares of Junior Preferred Stock to be converted, and the person or persons entitled to receive the shares of Common Stock issuable upon conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock on such date. From and after such date, all rights of the Holder with respect to the Junior Preferred Stock so converted shall terminate, except only the right of such holder, upon surrender of his or its certificate or certificates therefor, to receive certificates for the number of shares of Common Stock issuable upon conversion thereof and cash for fractional shares. (v) Mechanics of Automatic Conversion. All holders of record of --------------------------------- shares of Junior Preferred Stock will be given written notice of the date of any automatic conversion referenced in Section (h) (ii). Such notice will be sent by mail, first class, postage prepaid, to each record holder of Junior Preferred Stock at such holder's address appearing on the stock register. Each holder of shares of Junior Preferred Stock shall, promptly after receiving such notice, surrender such holder's certificate or certificates for all such shares to the Company at the place designated in such notice, and shall thereafter receive certificates for the number of shares of Common Stock or other securities to which such holder is entitled. Upon the date of any such automatic conversion, all rights with respect to the Junior Preferred Stock will terminate, except only the rights of the holders thereof, upon surrender of their certificate or certificates therefor, to receive certificates for the number of shares of Common Stock or other securities into which such Junior Preferred Stock has been converted and cash for fractional shares, plus any dividends thereon declared and unpaid as of the time of such conversion. All certificates evidencing shares of Junior Preferred Stock which are automatically converted in accordance with the provisions hereof shall, from and after the date of such automatic conversion, be deemed to have been retired and canceled and the shares of Junior Preferred Stock represented thereby converted into Common Stock for all purposes, notwithstanding the failure of the holder or holders thereof to surrender such certificates. As soon as practicable after the date of any such automatic conversion and the surrender of the certificate or certificates for Junior Preferred Stock as aforesaid, the Company shall cause to be issued and delivered to such holder, or to such holder's 8 written order, a certificate or certificates for the number of full shares of Common Stock or other securities issuable on such conversion in accordance with the provisions hereof and cash as provided in Subsection (h) (iii) in respect of any fraction of a share of Common Stock otherwise issuable upon such conversion. (vi) Certain Adjustments to Conversion Price. ---------------------------------------- (A) Adjustment for Stock Splits, Stock Dividends and Combinations ------------------------------------------------------------- of Common Stock. In the event the outstanding shares of Common Stock shall, - --------------- after the filing of this Certificate of Designation, be further subdivided (split), or combined (reverse split), by reclassification or otherwise, or in the event of any dividend or other distribution payable on the Common Stock in shares of Common Stock, the Conversion Price in effect immediately prior to such subdivision, combination, dividend or other distribution shall, concurrently with the effectiveness of such subdivision, combination or dividend or other distribution, be proportionately adjusted. (B) Adjustment for Merger or Reorganization, Etc. In case of a --------------------------------------------- reclassification, reorganization or exchange transaction or any consolidation or merger of the Company with another corporation (other than a merger or other reorganization which is deemed to be a liquidation pursuant to Section (d)), each share of Junior Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property to which a holder of the number of shares of Common Stock of the Company deliverable upon conversion of such Junior Preferred Stock would have been entitled upon such reclassification, reorganization, exchange, consolidation, merger or conveyance; and, in any such case, appropriate adjustment (as determined by the Board) shall be made in the application of the provisions herein set forth with respect to the rights and interests thereafter of the holders of the Junior Preferred Stock, to the end that the provisions set forth herein (including provisions with respect to changes in and other adjustments of the Conversion Price) shall thereafter be applicable, as nearly as reasonably may be, in relation to any shares of stock or other property thereafter deliverable upon the conversion of the Junior Preferred Stock. (C) Adjustments for Other Dividends and Distributions. In the ------------------------------------------------- event the Company at any time or from time to time after the filing of this Certificate of Determination makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Company other than shares of Common Stock, then and in each such event provision shall be made so that the holders of Junior Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of securities of the Company which they would have received had their Junior Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section (h) with respect to the rights of the holders of the Junior Preferred Stock. 9 (i) Reissuance of Junior Preferred Stock. Shares of Junior Preferred ------------------------------------ Stock that have been issued and reacquired in any manner shall not be reissued as shares of Junior Preferred Stock and shall (upon compliance with any applicable provisions of the laws of California) have the status of authorized and unissued shares of Preferred Stock undesignated as to series and may be redesignated and reissued as part of any series of Preferred Stock; provided, -------- however, that so long as any shares of Junior Preferred Stock are outstanding, - ------- any issuance of such shares must be in compliance with the terms hereof. (j) Certificates. ------------ (i) Form and Dating. The Junior Preferred Stock shall be in --------------- the form approved by the Company in accordance with the applicable provision of the laws of California. The Junior Preferred Stock certificate may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). (ii) Execution. Two Officers shall sign the certificates --------- representing Junior Preferred Stock for the Company by manual or facsimile signature. The Company's seal shall be impressed, affixed, imprinted or reproduced on the Junior Preferred Stock and may be in facsimile form. (iii) Legend. Each certificate evidencing the Junior Preferred ------ Stock shall bear a legend in substantially the following form: THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION REGISTERED UNDER SUCH ACT OR PURSUANT TO AN AVAILABLE EXEMPTION THEREFROM UNDER SAID ACT OR THE RULES AND REGULATIONS PROMULGATED THEREUNDER. RESOLVED FURTHER, that the President and Secretary of the Company are hereby authorized and directed to execute, acknowledge, file and record a Certificate of Determination of Preferences in accordance with the foregoing resolutions and provisions of California law. 10 The undersigned each further declares under penalty of perjury under the laws of the State of California that the matters set forth in this certificate are true and correct of his own knowledge and that this certificate has been executed on August 2, 2001 in Temecula, California. /s/ Richard W. Johansen ------------------------------ Richard W. Johansen, President /s/ Patrick Yount ------------------------------ Patrick Yount, Secretary EX-10.19 5 dex1019.txt SUBORDINATION AGREEMENT DATED APRIL 17, 2001 EXHIBIT 10.19 SUBORDINATION AGREEMENT ----------------------- SUBORDINATION AGREEMENT, dated as of April 17, 2001 (the "Agreement"), made by Hudson Respiratory Care Inc. (the "Borrower"), FS Equity Partners IV, L.P., a Delaware limited partnership, and the additional parties signatory hereto (collectively, the "Subordinated Creditors"), and Bankers Trust Company, as Administrative Agent for the Lenders (collectively the "Lenders") from time to time party to the Credit Agreement (as defined below) (in such capacity, the "Administrative Agent"). RECITALS A. The Borrower previously entered into that certain Credit Agreement dated as of April 7, 1998 among the Borrower, River Holding Corp., the Lenders party thereto (the "Lenders"), Salomon Brothers Inc, as Arranger, Advisor and Syndication Agent, and Bankers Trust Company, as Administrative Agent and Collateral Agent, as amended (the "Credit Agreement") whereby the Lenders agreed to extend credit to the Borrower upon the terms and conditions contained in the Credit Agreement. B. The Borrower is contemplating borrowing up to an aggregate of $15.0 million from the Subordinated Creditors pursuant to one or more Senior Subordinated Convertible Promissory Notes dated as of the date of this Agreement or of a subsequent date made by the Borrower in favor of the Subordinated Creditors (collectively, and together with any accrued interest thereon, the "Subordinated Debt"). C. The Subordinated Creditors and the Borrower have agreed that the Subordinated Debt will be subordinated to the Senior Debt (as defined in Section ------- 1). - - D. The Subordinated Creditors desire to subordinate the Subordinated Debt at any time owed to such Subordinated Creditors to the Senior Debt in accordance with the provisions of this Agreement. NOW, THEREFORE, in consideration of the premises, the Subordinated Creditors and the Borrower hereby agree as follows: AGREEMENT 1. Agreement to Subordinate. The Subordinated Creditors and Borrower ------------------------ agree that the Subordinated Debt is and shall be subordinate, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full in cash of the Senior Debt. "Senior Debt" of the Borrower means (a) all obligations consisting of the principal, accrued and unpaid interest (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Borrower to the extent post-filing interest is allowed in such proceeding) and fees and other amounts payable by the Borrower to the Administrative Agent or the Lenders from time to time under the Credit Documents (as defined in the Credit Agreement) in respect of indebtedness of the Borrower under the Credit Documents; and (b) all obligations of the Borrower (i) for the reimbursement of any obligor on any letter of credit, bankers' acceptance or similar credit transaction with respect to the Credit Documents; and (ii) under any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, foreign currency exchange agreement or other interest or exchange rate hedging agreement entered into with respect to the Credit Documents designed to protect against fluctuations in interest rates. 2. No Payment on the Subordinated Debt. Unless and until the Senior Debt ----------------------------------- and all other obligations of Borrower with respect to the Senior Debt are paid in full in cash, the Subordinated Creditors hereby agree not to accept, ask, demand, sue for, take, create or receive from the Borrower, directly or indirectly, in cash or other property or by set-off or in any other manner (including without limitation from or by way of collateral), payment of all or any of the Subordinated Debt. The parties hereto acknowledge that at the option of the Borrower, interest on the Subordinated Debt may (a) be paid semi-annually on each April 15 and October 15, beginning on October 15, 2001 (each such semi- annual date that an interest payment is due, an "Interest Payment Date") but only through the issuance on any Interest Payment Date of an additional promissory note of equal ranking to the Subordinated Debt and on the same terms and conditions provided for therein, such additional promissory note to be issued in a principal amount that corresponds with the amount of the interest payment that would otherwise be due on such Interest Payment Date or (b) accrue, such accruing amount to be compounded semi-annually. 3. In Furtherance of Subordination. The Subordinated Creditors hereby ------------------------------- agree as follows: a. Upon any distribution of all or any of the assets of the Borrower to creditors of the Borrower, in connection with any bankruptcy, reorganization, insolvency or other similar proceeding (a "Proceeding"), any payment or distribution of any kind (whether in cash, property or securities) which otherwise would be payable or deliverable upon or with respect to the Subordinated Debt shall be paid or delivered directly to the Administrative Agent in such capacity. b. If any Proceeding is commenced by or against the Borrower: i. The Administrative Agent is hereby irrevocably authorized and empowered, but shall have no obligation, to demand, sue for, collect and receive every payment or distribution referred to in subsection 3.1 above and give acquittance therefor and to file claims and proofs of claim and take such other actions (including, without limitation, voting the Subordinated Debt or enforcing any security interest or other lien securing payment of the Subordinated Debt) as it may deem necessary or advisable for the exercise or enforcement of any of its rights or interests hereunder; and 2 ii. The Subordinated Creditors shall duly and promptly take such action as the Administrative Agent may request (A) to collect the Subordinated Debt for account of the Administrative Agent and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver to the Administrative Agent on behalf of the Lenders such powers of attorney, assignment, or other instruments as it may request in order to enable it to enforce any and all claims with respect to, and any security interests and other liens securing payment of, the Subordinated Debt, and (C) to collect and receive any and all payments or distributions which may be payable or deliverable upon or with respect to the Subordinated Debt. c. All payments or distributions upon or with respect to the Subordinated Debt which are received by any Subordinated Creditor contrary to the provisions of this Agreement shall be received in trust for the benefit of the Administrative Agent on behalf of the Lenders, shall be segregated from other funds and property held by such Subordinated Creditor and shall be forthwith paid over to the Administrative Agent in the same form as so received (with any necessary indorsement) to be applied (in the case of cash) to or held as collateral (in the case of non-cash property or securities) for the payment or prepayment of Senior Debt in accordance with its terms. d. The Administrative Agent is hereby authorized to demand specific performance of this Agreement, whether or not the Borrower shall have complied with any of the provisions hereof applicable to it, at any time when any Subordinated Creditor shall have failed to comply with any of the provisions of this Agreement applicable to it. The Subordinated Creditors hereby irrevocably waive any defense based on the adequacy of a remedy at law, which might be asserted as a bar to such remedy of specific performance. 4. No Commencement of Any Proceeding. Each Subordinated Creditor agrees --------------------------------- that, so long as any of the obligations under the Senior Debt shall remain unpaid, such Subordinated Creditor will not commence, or join with any creditor other than the Administrative Agent in commencing, any Proceeding. 5. Rights of Subrogation. The Subordinated Creditors agree that no --------------------- payment or distribution to the Administrative Agent pursuant to the provisions of this Agreement shall entitle any Subordinated Creditor to exercise any rights of subrogation in respect thereof until the Senior Debt has been paid in full in cash. 6. Subordination Legend; Further Assurances. The Subordinated Creditors ---------------------------------------- and the Borrower will cause each instrument evidencing Subordinated Debt to be endorsed with the following legend: "THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE PRIOR PAYMENT IN FULL OF THE SENIOR DEBT (AS DEFINED IN THE SUBORDINATION AGREEMENT HEREINAFTER REFERRED TO) PURSUANT TO, AND TO THE EXTENT PROVIDED IN, THE SUBORDINATION AGREEMENT 3 DATED AS OF APRIL 17, 2001 BY THE MAKER HEREOF AND PAYEE NAMED HEREIN IN FAVOR OF BANKERS TRUST COMPANY, AS ADMINISTRATIVE AGENT FOR THE LENDERS UNDER THE CREDIT AGREEMENT REFERRED TO IN SUCH SUBORDINATION AGREEMENT." The Subordinated Creditors and the Borrower will further mark their respective books of account in such a manner as shall be effective to give proper notice of the effect of this Agreement and will, in the case of any Subordinated Debt which is not evidenced by any instrument, upon the Administrative Agent's written request, cause such Subordinated Debt to be evidenced by an appropriate instrument or instruments endorsed with the above legend. The Subordinated Creditors will upon the Administrative Agent's request deliver to the Administrative Agent true and correct copies of all instruments, if any, evidencing Subordinated Debt. The Subordinated Creditors and the Borrower will, at their expense and at any time and from time to time, promptly execute and deliver all further instruments and documents, and take all further action, that, may be necessary or desirable, or that the Administrative Agent may reasonably request, in order to protect any right or interest granted or purported to be granted hereby or to enable the Administrative Agent to exercise and enforce its rights and remedies hereunder. 7. No Change in or Disposition of Subordinated Debt. The Subordinated ------------------------------------------------ Creditors will not, without the consent of the Administrative Agent: a. Cancel or otherwise discharge any of the Subordinated Debt (except upon (a) payment in full in cash thereof paid to the Administrative Agent as contemplated by Section 3.3 or (b) conversion of the Subordinated Debt into common stock of the Borrower in accordance with the terms of the Subordinated Debt) or subordinate any of the Subordinated Debt to any indebtedness of the Borrower other than the Senior Debt; b. Sell, assign, pledge, encumber or otherwise dispose of any of the Subordinated Debt, except that the Subordinated Creditors may transfer up to $1,000,000 in principal amount of Subordinated Debt within thirty (30) days of the date hereof, provided that, in connection with such transfer, such transferee executes a counterpart of the signature page to this Agreement evidencing such transferee's agreement to be bound by the provisions of this Agreement; or c. Permit the terms of any of the Subordinated Debt to be changed in any manner other than changes that only extend the maturity of or lower the interest rate on the Subordinated Debt. 8. Agreements by the Borrower. The Borrower agrees that it will not make -------------------------- any payment of any of the Subordinated Debt, or take any other action, in contravention of the provisions of this Agreement. 9. Obligations Hereunder Not Affected. All rights and interests of the ---------------------------------- Administrative Agent hereunder, and all agreements and obligations of the Subordinated 4 Creditors and the Borrower under this Agreement, shall remain in full force and effect irrespective of: i. any lack of validity or enforceability of the Senior Debt or any agreement or instrument relating thereto; ii. any change in the time, manner of place of payment of, or in any other term of the Senior Debt, or any other amendment or waiver of or any consent to departure from the Senior Debt; iii. any taking and holding of any collateral or security or additional guarantees for all or any of the Senior Debt; or any amendment, alteration, exchange, substitution, transfer, enforcement, waiver, subordination, termination or release of any collateral or such guarantees, or any non-perfection of any collateral, or any consent to departure from any such guaranty; iv. any manner of application of collateral or proceeds thereof, to all or any of the Senior Debt, or the manner of sale of any collateral or other security; v. any consent by the Administrative Agent to the change, restructure or termination of the partnership structure or existence of the Borrower and any corresponding restructure of the Senior Debt, or any other restructure or refinancing of the Senior Debt or any portion thereof; vi. any modification, compounding, compromise, settlement, release by the Administrative Agent, collection or other liquidation of the Senior Debt or of any collateral or security in whole or in part, and any refusal of payment to the Administrative Agent in whole or in part, from any obligor or guarantor in connection with any of the Senior Debt, whether or not with notice to, or further assent by, or any reservation of rights against, the Subordinated Creditors; or vii. any other circumstance (including, but not limited to, any statute of limitations) which might otherwise constitute a defense available to, or a discharge of the Borrower or the Subordinated Creditors. Without limiting the generality of the foregoing, the Subordinated Creditors hereby consent to, and hereby agree, that the rights of the Administrative Agent hereunder, and the enforceability hereof, shall not be affected by any and all releases of any collateral or security from the liens and security interests created by any security agreement, pledge agreement or other agreement whether for purposes of sales or other dispositions of assets or for any other purpose. This Agreement shall continue to be effective or be reinstated, as the case may be, if at any time any payment of any of the Senior Debt is rescinded or must otherwise be returned by the Administrative Agent upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise, all as though such payment had not been made. 5 10. Waiver. ------ a. The Subordinated Creditors and the Borrower hereby waive promptness, diligence, notice of acceptance and any other notice with respect to any of the Senior Debt and this Agreement and any requirement that the Administrative Agent protect, secure, perfect or insure any security interest or lien or any property subject thereto or exhaust any right or take any action against the Borrower or any collateral or security. b. The Subordinated Creditors and the Borrower hereby waive any right to require the Administrative Agent to proceed against any party hereto or any other Person, or proceed against or exhaust any collateral or security, or pursue any other remedy in the power of the Administrative Agent or any other Person. c. The Subordinated Creditors and the Borrower agree that the Administrative Agent, in its sole discretion, without notice or demand and without affecting the enforceability of this Agreement, may foreclose on any deed of trust or mortgage securing all or a portion of the Senior Debt and the interests in real property secured thereby by nonjudicial sale; and the Subordinated Creditors and the Borrower hereby waive any defense to the enforceability hereof by the Administrative Agent against the Subordinated Creditors or the Borrower after a nonjudicial sale even though the Subordinated Creditors' right of subrogation may be altered, impaired or extinguished thereby. 11. Representations and Warranties. Each of the Subordinated Creditors ------------------------------ and the Borrower hereby represents and warrants as follows: a. The Subordinated Debt (i) has been duly authorized by the Borrower as applicable, (ii) has not been, and will not be, amended or otherwise modified and (iii) constitutes the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. There exists no default in respect of any such Subordinated Debt. b. The Subordinated Creditors own the Subordinated Debt free and clear of any lien, security interest, charge or encumbrance or any rights of others. 12. Amendments, Etc. No amendment or waiver of any provision of this --------------- Agreement nor consent to any departure by the Subordinated Creditors or the Borrower therefrom shall in any event be effective unless the same shall be in writing and signed by the Required Lenders (as defined in the Credit Agreement) and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. 13. Expenses. The Subordinated Creditors and the Borrower jointly and -------- severally agree to pay, upon demand, to the Administrative Agent the amount of any and all reasonable expenses, including the reasonable fees and expenses of its counsel, which the Administrative 6 Agent may incur in connection with the exercise or enforcement of any of its rights or interests hereunder. 14. Addresses for Notices. All notices, requests, demands and other --------------------- communications provided for or permitted hereunder shall, unless otherwise stated herein, be in writing (including telex, or telecopied communications) and shall be sent by mail (by registered or certified mail, return receipt requested), telex, telecopier or hand delivery: a. If to any Subordinated Creditor or the Borrower, to it at its address set forth on the signature pages hereof or at such other address as shall be designated by it in a written notice to the Administrative Agent complying as to delivery with the terms of this Section; or b. If to the Administrative Agent, addressed to it at the address for notices to the Administrative Agent provided in the Credit Agreement. All such notices, requests, demands and other communications shall be effective (a) when mailed, on the earlier of receipt or the third Business Day after being deposited in the mails with postage prepaid, (b) when sent by telex, upon confirmation by telex answerback, (c) when sent by telecopy, upon receipt thereof, and (d) upon personal delivery thereof. 15. References to the Administrative Agent. Any reference herein to "the -------------------------------------- Administrative Agent" shall be a reference herein to the Administrative Agent or any successor administrative agent appointed pursuant to the terms of the Credit Agreement. It is understood and agreed that the Administrative Agent is not required to act or to refrain from acting without the consent of the Required Lenders to the extent such consent is required by the Credit Agreement. 16. No Waiver; Remedies. No failure on the part of the Administrative ------------------- Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. 17. Continuing Agreement. This Agreement is a continuing agreement and -------------------- shall (i) remain in full force and effect until the Senior Debt shall have been paid in full in cash, (ii) be binding upon the Subordinated Creditors and the Borrower and their respective successors and assigns, and (iii) inure to the benefit of, and shall be enforceable by the Administrative Agent and its respective successors, transferees and assigns. 18. Counterparts. This Agreement may be signed in any number of ------------ counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement shall become effective as to each party hereto after a counterpart hereof shall have been signed by such party. 7 19. Waiver of Jury Trial. The Subordinated Creditors and the Borrower -------------------- hereby irrevocably waive all right to trial by jury in any action, proceeding or counterclaim arising out of or relating to this Agreement. 20. Governing Law. This Agreement shall be governed by, and construed in ------------- accordance with, the laws of the State of New York. 8 WITNESS WHEREOF, the Subordinated Creditors and the Borrower have caused this Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. BORROWER: HUDSON RESPIRATORY CARE INC. By: /s/ Patrick G. Yount --------------------------- Title: Chief Financial Officer ------------------------ Address: c/o Hudson Respiratory Care Inc. -------------------------------- 27711 Diaz Road -------------------------------- Temecula, California 92590 -------------------------------- ADMINISTRATIVE AGENT: BANKERS TRUST COMPANY, in its capacity as Administrative Agent under the Credit Agreement By: /s/ Mary Jo Jolly --------------------------- Title: Assistant Vice President ------------------------ SUBORDINATED FS EQUITY PARTNERS IV, L.P. CREDITORS: By: FS CAPITAL PARTNERS, LLC, General Partner By: /s/ Jon D. Ralph ----------------------- By: Jon D. Ralph ---------------- Title: Vice President -------------- Address: c/o Freeman Spogli & Co. Incorporated 11100 Santa Monica Boulevard, Suite 1900 Los Angeles, California 90025 Attention: Mr. Jon D. Ralph 9 ADDITIONAL ---------- SUBORDINATED CREDITORS ---------------------- Address: THE HELEN HUDSON LOVAAS SEPARATE PROPERTY TRUST U/D/T DATED c/o Hudson Respiratory Care JULY 17, 1997 - --------------------------- 27711 Diaz Road - --------------------------- Temecula, CA 92590 - --------------------------- By: /s/ Helen Hudson Lovaas ---------------------------- Helen Hudson Lovaas, Trustee Address: c/o Hudson Respiratory Care /s/ Richard W. Johansen - --------------------------- ---------------------------- 27711 Diaz Road Richard W. Johansen - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Jay R. Ogram - --------------------------- ---------------------------- 27711 Diaz Road Jay R. Ogram - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Lougene Williams - --------------------------- ---------------------------- 27711 Diaz Road Lougene Williams - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Jeffrey D. Brown - --------------------------- ---------------------------- 27711 Diaz Road Jeffrey D. Brown - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Brian W. Morgan - --------------------------- ---------------------------- 27711 Diaz Road Brian W. Morgan - --------------------------- Temecula, CA 92590 - --------------------------- 10 ADDITIONAL ---------- SUBORDINATED CREDITORS ---------------------- Address: c/o Hudson Respiratory Care /s/ Ola Magnusson - --------------------------- ---------------------------- 27711 Diaz Road Ola Magnusson - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Patrick Yount - --------------------------- ---------------------------- 27711 Diaz Road Patrick Yount - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Jeri E. Eiserman - --------------------------- ---------------------------- 27711 Diaz Road Jeri E. Eiserman - --------------------------- Temecula, CA 92590 - --------------------------- Address: c/o Hudson Respiratory Care /s/ Douglas Y. Handa - --------------------------- ---------------------------- 27711 Diaz Road Douglas Y. Handa - --------------------------- Temecula, CA 92590 - --------------------------- 11 EX-10.20 6 dex1020.txt AMDMNT #5 TO THE CREDIT AGMT. DATED JULY 30, 2001 EXHIBIT 10.20 AMENDMENT NO. 5 TO AND LIMITED WAIVER OF CERTAIN PROVISIONS OF CREDIT AGREEMENT This AMENDMENT NO. 5 TO AND LIMITED WAIVER OF CERTAIN PROVISIONS OF CREDIT AGREEMENT (this "Amendment and Waiver") is made and entered into as of July 30, 2001, by and among HUDSON RESPIRATORY CARE INC., a California corporation (the "Borrower"), RIVER HOLDING CORP., a Delaware corporation ("Holding") and the Required Lenders (as defined in Article I of the Credit Agreement). RECITALS A. The Borrower, Holding, the Lenders (as defined in Article I of the Credit Agreement), Salomon Brothers Inc., as Arranger, Advisor and Syndication Agent, and Bankers Trust Company, as Administrative Agent and Collateral Agent, entered into a Credit Agreement dated as of April 7, 1998 (as amended and otherwise modified to the date hereof, the "Credit Agreement"). Capitalized terms used herein and not otherwise defined shall have the meanings assigned to them in the Credit Agreement. B. The Borrower requested certain changes to the Credit Agreement and the waiver of certain provisions of the Credit Agreement. C. The Required Lenders are willing to so amend the Credit Agreement and waive certain provisions thereof on the terms and conditions set forth herein. D. The Borrower, Holding and the Required Lenders are entering this Amendment and Waiver pursuant to Section 9.08(b) of the Credit Agreement. AGREEMENTS In consideration of the foregoing Recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Borrower, Holding and the Required Lenders agree as follows: 1. Definitions. (a) The definition of "Consolidated Interest Expense" is amended in its entirety to read as follows: "'Consolidated Interest Expense' means, for any period, the total interest expense of the Borrower and its consolidated Restricted Subsidiaries, other than any non-cash interest expense with respect to the FS Convertible Senior Subordinated Debt, plus, to the extent not included in such total interest expense, and to the extent Incurred by the Borrower or its Restricted Subsidiaries, (a) interest expense attributable to capital leases, (b) amortization of Indebtedness discount and debt issuance cost, including commitment fees, (c) capitalized interest, (d) non-cash interest expenses other than any non-cash interest expense with respect to the FS Convertible Senior Subordinated Debt, (e) commissions, discounts and other fees and charges owed with respect to letters of credit and bankers' acceptance financing, (f) net costs associated with Hedging Obligations (including amortization of fees), (g) dividends and other distributions on Disqualified Stock, (h) Preferred Stock dividends in respect of all Preferred Stock of Restricted Subsidiaries held by persons other than the Borrower or a wholly owned Subsidiary (to the extent paid in cash), (i) interest Incurred in connection with Investments in discontinued operations, (j) interest accruing on any Indebtedness of any other person to the extent such Indebtedness is Guaranteed by the Borrower or any Restricted Subsidiary and (k) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any person (other than the Borrower) in connection with Indebtedness Incurred by such plan or trust." (b) The definition of "Debt/Adjusted EBITDA Ratio" is amended in its entirety to read as follows: "'Debt/Adjusted EBITDA Ratio' means, as of any date with respect to the Borrower and its consolidated Restricted Subsidiaries, (a) the total amount of Debt of the Borrower and its consolidated Restricted Subsidiaries, excluding any FS Convertible Senior Subordinated Debt, as of such date to (b) Adjusted EBITDA of the Borrower and its consolidated Subsidiaries for the period of four fiscal quarters most recently ended for which financial statements are available." (c) The first sentence of the definition of "EBITDA" is amended in its entirety to read as follows: "'EBITDA' means, for any period, an amount equal to, for the Borrower and its consolidated Restricted Subsidiaries, (a) the sum of Consolidated Net Income for such period, plus the following to the extent reducing Consolidated Net Income for such period: (i) the provision for taxes based on income or profits or utilized in computing net loss, (ii) Consolidated Interest Expense plus any noncash interest expense with respect to the FS Convertible Senior Subordinated Debt, (iii) depreciation, (iv) amortization, (v) any other non-cash items (other than any such non-cash item to the extent that it represents an accrual of or reserve for cash expenditures in any future period), minus (b) all non-cash items increasing Consolidated Net Income for such period (other than any such non-cash item to the extent that it will result in the receipt of cash payments in any future period)." (d) The definition of "Equity Issuance" is amended in its entirety to read as follows: "'Equity Issuance' means the issuance by Holding or the Borrower of any equity interests therein, or the issuance or sale by Holding or the Borrower of any instrument or obligation convertible into or exchangeable for, or giving any person any right, option or warrant to acquire from Holding or the Borrower any 2 equity interests therein or any such convertible or exchangeable instrument or obligation, but excluding (i) the Excluded Shares, (ii) the issuance of shares of the Borrower to Holding pursuant to the Gibeck AB Acquisition, (iii) the issuance of shares by Holding pursuant to the Gibeck AB Acquisition, (iv) the Additional Equity, if any, and (v) any shares issued by the Borrower to any of its shareholders in exchange for the proceeds of the Additional Equity or the FS Convertible Senior Subordinated Debt." (e) The definition of "Excluded Shares" is amended in its entirety to read as follows: "'Excluded Shares' means Capital Stock of Holding, issued to an employee of Holding, the Borrower or any Subsidiary of the Borrower pursuant to any stock option, stock purchase, stock incentive or other similar plan of Holding, the Borrower or any Subsidiary of the Borrower established for the benefit of their employees (collectively, an "Employee Stock Issuance"), or any Capital Stock of the Borrower issued to Holding in consideration of the contribution by Holding to Borrower of the cash proceeds of any such Employee Stock Issuance." (f) The definition of "Permitted Acquisition" is amended by replacing the figure "$45,000,000" in clause (e)(ii)(A) thereof with the figure "$40,000,000" and by adding the following proviso at the end thereof: "; provided that notwithstanding anything in this Agreement to the contrary, without the prior written consent of Required Lenders, no Asset Acquisitions or Stock Acquisitions shall be permitted on and after the Fifth Amendment Effective Date." (g) the definition of "Pricing Adjustment" is amended by deleting the "and" at the end of clause (ii) thereof and by adding the following prior to the period at the end of clause (iii) thereof: "; and (iv) the Pricing Adjustment shall be 0% during the period from the Fifth Amendment Effective Date through June 30, 2002." (h) The definition of "Revolving Credit Maturity Date" is amended in its entirety to read as follows: "'Revolving Credit Maturity Date' means June 30, 2003." (i) The definition of "Subordinated Obligations" is amended by adding the phrase "including, but not limited to the FS Convertible Senior Subordinated Debt" at the end thereof. 3 (j) The definition of "Term Loan Maturity Date" is amended in its entirety to read as follows: "'Term Loan Maturity Date' means June 30, 2003." (k) The following definitions are inserted in Section 1.01 of the Credit Agreement in alphabetical order: "'Acquisition Loans' has the meaning set forth in Section 3.13(e)(1). 'Additional Equity' means (a) Capital Stock of Holding or the Borrower issued in exchange for up to $18,000,000 in cash proceeds paid by Freeman Spogli, an Affiliate of Freeman Spogli, management of Holding and/or the Borrower and other existing shareholders of Holding and/or the Borrower so long as such cash proceeds are either contributed to the Borrower or used to purchase Capital Stock of the Borrower on or prior to the Fifth Amendment Effective Date plus (b) any Capital Stock of Holding or the Borrower issued upon conversion of the FS Convertible Senior Subordinated Debt which Capital Stock, to the extent constituting Capital Stock of the Borrower, shall be pledged to the Administrative Agent pursuant to a non-recourse Pledge Agreement, satisfactory in form and substance to Administrative Agent, by the holders thereof. 'Fifth Amendment' means that certain Amendment No. 5 and Limited Waiver to this Agreement dated as of July 30, 2001. 'Fifth Amendment Effective Date' means the date on which the Fifth Amendment becomes effective pursuant to paragraph 22 thereof. 'FS Convertible Senior Subordinated Debt' means up to $15,000,000 in aggregate principal amount of unsecured convertible senior subordinated notes of the Borrower owing to an Affiliate of Freeman Spogli, Freeman Spogli, management of Holding and/or the Borrower and/or other existing shareholders of Holding or the Borrower (which may include up to $6,500,000 in FS Convertible Senior Subordinated Debt issued in April and May 2001 and Indebtedness outstanding pursuant to Section 6.01(j) hereof), and any unsecured convertible senior subordinated notes issued in lieu of cash interest thereon, as the same may be amended, supplemented or otherwise modified from time to time in accordance with the terms hereof and thereof; provided that (1) interest shall not be payable in cash on such notes but shall be either accrued and compounded or shall be payable by the issuance of additional unsecured convertible senior subordinated notes to the extent such issuance is in compliance with the requirements of any indenture governing Subordinated Obligations of the Borrower or any Subsidiary; (2) such notes shall not mature earlier than March 31, 2005 and shall have no scheduled amortization or sinking fund payments payable thereon; and (3) payments on or with respect to such notes shall be subordinated on terms and conditions substantially in the form attached as Annex A to the Fifth Amendment. 4 'Independent Consultant' means a consultant not affiliated with any Credit Party or any Lender. 'Working Capital Loans' has the meaning set forth in Section 3.13(e)(2)." 2. Commitments. The second sentence in Section 2.01 shall be amended in its entirety to read as follows: "Within the limits set forth in clause (b) of the preceding sentence and subject to the terms, conditions and limitations set forth herein, the Borrower may borrow, pay or prepay and reborrow Revolving Loans; provided however that on and after the Fifth Amendment Effective Date, -------- Borrower may not borrow or reborrow Acquisition Loans (as defined in Section 3.13(e)(1))." 3. Fees. Section 2.05 is amended by adding the following subsections immediately after subsection (d) thereof: "(e) The Borrower agrees to pay to each Lender, through the Administrative Agent, on July 1, 2002, a fee equal to 0.075% of the sum of such Lender's Revolving Credit Commitment and outstanding Term Loans as of such date. (f) If the compliance certificate filed by the Borrower with respect to the fiscal period ended June 30, 2002 sets forth a Debt/Adjusted EBITDA Ratio in excess of 4.90:1.00, or if such compliance certificate is not filed by the deadline set forth in Section 5.04(b), the Borrower agrees to immediately pay each Lender, through the Administrative Agent, a fee equal to 0.025% of the sum of such Lender's Revolving Credit Commitment and outstanding Term Loans as of such deadline." 4. Interest on Loans. (a) Section 2.06(a) is amended in its entirety to read as follows: "(a) Subject to the provisions of Section 2.07, the Loans comprising each ABR Borrowing, including each Swingline Loan, shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, when the Alternate Base Rate is determined by reference to the Prime Rate and over a year of 360 days at all other times) at a rate per annum equal to the Alternate Base Rate plus (i) from the Fifth Amendment Effective Date through June 30, 2002, 3.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 3.25% less the applicable Pricing Adjustment in the case of Acquisition Loans; (ii) from July 1, 2002 through March 31, 2003, 3.50% less the applicable Pricing Adjustment in the case of Term Loans and Working 5 Capital Loans and 3.75% less the applicable Pricing Adjustment in the case of Acquisition Loans; and (iii) from April 1, 2003, 4.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.25% less the Applicable Pricing Adjustment in the case of Acquisition Loans." (b) Section 2.06(b) is amended in its entirety to read as follows: "(b) Subject to the provisions of Section 2.07, the Loans comprising each Eurodollar Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to the Adjusted Eurodollar Rate for the Interest Period in effect for such Borrowing plus (i) from the Fifth Amendment Effective Date through June 30, 2002, 4.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.25% less the applicable Pricing Adjustment in the case of Acquisition Loans; (ii) from July 1, 2002 through March 31, 2003, 4.50% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 4.75% less the applicable Pricing Adjustment in the case of Acquisition Loans; and (iii) from April 1, 2003, 5.00% less the applicable Pricing Adjustment in the case of Term Loans and Working Capital Loans and 5.25% less the Applicable Pricing Adjustment in the case of Acquisition Loans." 5. Default Interest. Section 2.07 is hereby amended in its entirety as follows: "Upon the occurrence and during the continuation of any Event of Default, the Borrower shall on demand from time to time pay interest, to the extent permitted by law, on the outstanding principal amount of all Loans, any interest payments thereon not paid when due and any fees and other amounts then due and payable hereunder on such Loans at the rate otherwise applicable to such Loan pursuant to Section 2.06 without making the applicable Pricing Adjustment plus 2.00% per annum." 6. Termination and Reduction of Commitments. Section 2.09(b) is hereby amended by adding at the end thereof the following: "The Borrower in making any voluntary reduction of the Revolving Credit Commitments may designate whether such reduction applies to the Revolving Credit Commitments available with respect to Acquisition Loans pursuant to Section 3.13(e)(1) hereof, or to the Revolving Credit Commitments available with respect to Working Capital Loans pursuant to Section 3.13(e)(2) hereof." 6 7. Repayment of Term Borrowings. Section 2.11(a) is hereby amended by deleting the figure "$3,000,000" each place it appears and by inserting in lieu thereof in the table for June 30, 2003, the figure "$12,000,000". 8. Mandatory Prepayments. (a) Section 2.13(a) is amended to add at the end thereof the following: "In the event that, as of any date of determination, the sum of (x) cash on hand plus (y) Permitted Investments exceeds $5,000,000 for a period of greater than 30 consecutive days, in each case as determined for Borrower and its Restricted Subsidiaries on a consolidated basis (the amount of such excess being hereinafter referred to as the `Excess Liquidity'), Borrower shall repay or prepay its Swingline Loans and its Revolving Credit Borrowings by an amount equal to such Excess Liquidity, such Excess Liquidity being applied to repay or prepay first Swingline Loans to the full extent thereof, second Working Capital Loans and third Acquisition Loans, in the case of Swingline Loans and Working Capital Loans without any related reduction in the Revolving Credit Commitment." (b) Section 2.13(c) is amended in its entirety to read as follows: "(c) In the event and on each occasion that (i) an Equity Issuance occurs as part of an initial public offering of the Capital Stock of the Borrower or Holding, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply Net Cash Proceeds therefrom in an amount equal to 50% of the net cash proceeds of the Capital Stock sold in such initial public offering (whether or not all such Capital Stock is offered by the Borrower or Holding) to prepay outstanding Term Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); provided, however, that the remaining portion of such Net Cash Proceeds shall be applied either (A) pursuant to Section 6.05(a)(iii) for the redemption of Exchangeable Preferred Stock (including accreted PIK liquidation preference) or (B) to prepay outstanding Term Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g); and (ii) an Equity Issuance occurs other than as part of an initial public offering of the Capital Stock of the Borrower or Holding, the Borrower shall, substantially simultaneously with (and in any event not later than the third Business Day next following) the occurrence of such Equity Issuance, apply 100% of the Net Cash Proceeds therefrom to prepay outstanding Term Loans and/or reduce the Revolving Credit Commitment in accordance with Section 2.13(g)." 9. Use of Proceeds. Section 3.13(e) is amended in its entirety to read as follows: 7 "(e) Notwithstanding anything in this Agreement to the contrary, but subject to Section 2.01(b) on and after the Fifth Amendment Effective Date, (1) not more than $40,000,000 of the Aggregate Revolving Credit Exposure outstanding at any time shall have been used by the Borrower for purposes of Permitted Acquisitions pursuant to Section 6.04(c) (the "Acquisition Loans"), (2) not more than $15,000,000 of the Aggregate Revolving Credit Exposure outstanding at any time may be used by the Borrower for any corporate purpose other than Permitted Acquisitions (the "Working Capital Loans"), and (3) no further Acquisition Loans will be made to the Borrower." 10. Maintaining Records; Access to Properties and Inspections. Section 5.07 is amended by adding the following subsection (c) at the end thereof: "(c) Following an Event of Default resulting from a failure of the Borrower to comply with Section 6.09, 6.10, 6.11 or 6.12 hereof and upon the request of the Administrative Agent, each Credit Party will, and will cause its subsidiaries to, cooperate with an Independent Consultant hired on behalf of the Lenders to conduct such examinations and inquiries with respect to the business, operations and prospects of Borrower and its subsidiaries as may be requested by the Administrative Agent in its discretion, the results of such examinations and inquiries to be reported to the Lenders; provided that such Independent Consultant shall be selected by the Borrower from a list of three such Independent Consultants selected by the Administrative Agent and that all costs and expenses of such Independent Consultant shall be paid by the Borrower." 11. Indebtedness. Section 6.01 is amended in its entirety to read as follows: "SECTION 6.01 Indebtedness. The Borrower will not, and will not permit any Restricted Subsidiary to, incur, create, assume or permit to exist any Indebtedness, except: (a) Indebtedness for borrowed money existing on the date hereof and set forth in Schedule 6.01(a); provided, however, that such Indebtedness shall be repaid concurrently with the incurrence of the Borrowing of the Initial Credit Event hereunder ("Indebtedness to be Paid"); (b) Indebtedness represented by the Notes and by the other Credit Documents; (c) Indebtedness under the Senior Subordinated Notes (as the same may be amended from time to time, without increasing the committed amount thereunder, except as otherwise permitted by this Section) and any Refinancing Indebtedness of the Borrower with respect thereto in an aggregate principal amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause and then outstanding, shall not exceed the sum of the then outstanding Indebtedness under the Senior Subordinated Notes; 8 (d) Indebtedness (i) of the Borrower to any wholly owned Restricted Subsidiary or to any Guarantor and (ii) of any Restricted Subsidiary to the Borrower or any wholly owned Restricted Subsidiary; (e) Indebtedness represented by the Guarantees of Indebtedness Incurred pursuant to clause (c) (provided, that any Guarantee with respect to the Senior Subordinated Notes will be subordinated to the same extent as the Senior Subordinated Notes) or clause (d); (f) Indebtedness relating to Capital Lease Obligations, Sale/Leaseback Transactions and Permitted Purchase Money Liens; provided, that (i) with respect to Capital Lease Obligations, Indebtedness relating to Purchase Money Liens and Unrestricted Sale/Leaseback Transactions, either (A) the Incurrence of such Indebtedness relating to Capital Expenditures, Unrestricted Sale/Leaseback Transactions and Permitted Purchase Money Liens would be permitted pursuant to Section 6.08 in the fiscal year in which it is Incurred, or (B) the aggregate principal amount of such Indebtedness does not exceed $10,000,000 at any one time; and (ii) with respect to Restricted Sale/Leaseback Transactions, if the Net Cash Proceeds thereof are applied in accordance with Section 2.13(b). (g) Indebtedness under Hedging Obligations; provided, however, that such Hedging Obligations are entered into for bona fide hedging purposes of the Borrower or its Restricted Subsidiaries (as determined in good faith by the Board of Directors or senior management of the Borrower) and correspond in terms of notional amount, duration, currencies and interest rates, as applicable, to Indebtedness of the Borrower or its Restricted Subsidiaries Incurred without violation of this Agreement or to business transactions of the Borrower or its Restricted Subsidiaries on customary terms entered into in the ordinary course of business; (h) Indebtedness represented by Guarantees constituting Investments permitted by Section 6.03(c)(iii)(B); (i) The FS Convertible Senior Subordinated Debt; and (j) Indebtedness in an aggregate principal amount which, together with all other Indebtedness of the Borrower and the Restricted Subsidiaries outstanding on the date of such Incurrence (other than Indebtedness permitted by clauses (a) through (g) and clause (i)) does not exceed $5,000,000 at any one time outstanding; provided that notwithstanding anything in this Agreement to the contrary, the sum of the aggregate outstanding principal amount of all Indebtedness permitted under clauses (i) and (j) of this Section 6.01 shall not exceed $15,000,000." 9 12. Mergers, Consolidations, Sales of Assets and Acquisitions. Section 6.04(c) is amended to read in its entirety as follows: "(c) The Borrower will not, and will not permit any Restricted Subsidiary to, purchase, lease, or otherwise acquire (in one transaction or a series of transactions) any Assets or capital stock (or other equity interests) of any person other than as permitted pursuant to Section 6.03 (provided that Investments pursuant to Section 6.03(d) shall be limited to Restricted Subsidiaries existing as of the Fifth Amendment Effective Date), Section 6.08 and, with the consent of Required Lenders, Permitted Acquisitions." 13. Dividends and Distributions; Restrictions on Ability of Subsidiaries to Pay Dividends. Section 6.05(a) is amended by amending the text preceding the first proviso contained in clause (a) thereof in its entirety to read as follows: "(a) Directly or indirectly, declare or pay any dividend or make any distribution (whether in cash, securities or other Property) on or with respect to the Capital Stock of the Borrower or any Restricted Subsidiary (including any payment in connection with any merger or consolidation with or into the Borrower or any Restricted Subsidiary) except for any dividends or distributions payable solely in its Capital Stock (other than Disqualified Stock) and except any dividend or distribution which is made to the Borrower or a wholly owned Restricted Subsidiary (provided that such Restricted Subsidiary is a Wholly Owned Subsidiary), or any dividend or distribution payable solely in shares of Capital Stock (other than Redeemable Stock) of the Borrower, purchase, repurchase, redeem, retire or otherwise acquire for value any Capital Stock of the Borrower or any Affiliate of the Borrower held by persons other than the Borrower or a Restricted Subsidiary or any Securities exchangeable for or convertible into any such Capital Stock (other than for or into Capital Stock of the Borrower that is not Disqualified Stock), purchase, repurchase, redeem, defease or otherwise acquire or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking fund payment any Subordinated Obligations (other than the purchase, repurchase or other acquisition of Subordinated Obligations purchased in anticipation of satisfying a sinking fund obligation, principal installment or final maturity, in each case due within one year of the date of acquisition, or the refinancing of any Subordinated Obligations with Refinancing Indebtedness), or make any Investment (other than pursuant to Section 6.03) in any person or to pay cash interest on the FS Convertible Senior Subordinated Debt (any such dividend, distribution, purchase, redemption, repurchase, defeasance, other acquisition, retirement, Investment or payment being herein referred to as a "Restricted Payment");" and by deleting the "or" at the end of clause (a)(vii)(B) thereof and inserting the following prior to the period at the end of clause (b) thereof: "or 10 (c) Make any interest payment, or permit its subsidiaries to make any interest payment on any Subordinated Obligations with the proceeds, in whole or in part, of Loans if at any time during the five Business Day period preceding the borrowing of such Loans, the outstanding aggregate Revolving Credit Exposure used by the Borrower for any purpose other than Permitted Acquisitions exceeds $8,000,000, unless the Administrative Agent has consented in writing to such payment." 14. Capital Expenditures. Section 6.08 is amended to add the following proviso at the end of the first sentence thereof: "; provided further that during the four fiscal quarter period, -------- commencing with the fourth fiscal quarter in fiscal year 2000 and through the third fiscal quarter in fiscal year 2001, the Borrower may exclude up to $750,000 in the aggregate in Capital Expenditures." 15. Debt/Adjusted EBITDA Ratio. Section 6.09 is amended in its entirety to read as follows: "SECTION 6.09. Debt/Adjusted EBITDA Ratio. The Debt/Adjusted EBITDA Ratio shall not exceed the following amounts as of the ends of the fiscal quarters of the Borrower ending nearest to the following dates:
Fiscal Quarter Ending Nearest to Debt/Adjusted EBITDA Ratio - -------------------------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 2004 - -------------------------------------------------------------------------------------------------------------- March 31 6.40:1.00 5.60:1.00 N/A 6.35:1.00 4.20:1.00 - -------------------------------------------------------------------------------------------------------------- June 30 6.75:1:00 6.40:1.00 6.00:1.00 N/A 5.55:1.00 4.10:1.00 - -------------------------------------------------------------------------------------------------------------- September 30 6.75:1.00 6.20:1.00 5.50:1.00 8.75:1.00 4.60:1.00 - -------------------------------------------------------------------------------------------------------------- December 31 6.40:1.00 6.00:1.00 6.90:1.00 6.35:1.00 4.40:1.00 - --------------------------------------------------------------------------------------------------------------
; provided that (i) for the period of four fiscal quarters ending nearest to September 30, 2001, the Debt/Adjusted EBITDA Ratio shall be calculated by dividing (a) the Debt of the Borrower and its Restricted Subsidiaries as of the last day of such period by (b) 2 times Adjusted EBITDA for the two fiscal quarters ended nearest to September 30, 2001; and (ii) for the period of four fiscal quarters ending nearest to December 31, 2001, the Debt/Adjusted EBITDA Ratio shall be calculated by dividing (a) the Debt of the Borrower and its Restricted Subsidiaries as of the last day of such period by 11 (b) 1.33 times Adjusted EBITDA for the three fiscal quarters ended nearest to December 31, 2001." 16. Minimum EBITDA. Section 6.10 is amended to read in its entirety as follows: "SECTION 6.10. Minimum EBITDA. The Borrower's EBITDA for the four fiscal quarters ending nearest to the following dates shall not be less than the following amounts:
Fiscal Quarter Ending Nearest to Minimum EBITDA - ---------------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 2003 - ---------------------------------------------------------------------------------------------------- March 31 $24,000,000 $26,500,000 N/A $29,000,000 $37,500,000 - ---------------------------------------------------------------------------------------------------- June 30 $24,000,000 $27,500,000 $ 2,750,000 $33,000,000 $38,000,000 - ---------------------------------------------------------------------------------------------------- September 30 $24,500,000 $28,000,000 $11,000,000 $36,000,000 - ---------------------------------------------------------------------------------------------------- December 31 $24,000,000 $25,000,000 $24,000,000 $22,500,000 $37,000,000 - ----------------------------------------------------------------------------------------------------
; provided that (i) for the period of four quarters ending nearest to June 30, 2001, minimum EBITDA shall be calculated for the one fiscal quarter ended nearest to June 30, 2001 only; (ii) for the period of four quarters ending nearest to September 30, 2001, minimum EBITDA shall be calculated for the two fiscal quarters ended nearest to September 30, 2001 only; and (iii) for the period of four quarters ending nearest to December 31, 2001, minimum EBITDA shall be calculated for the three fiscal quarters ended nearest to December 31, 2001 only." 17. Interest Coverage Ratio. Section 6.11(d) is amended in its entirety as follows: "(d) The ratio of EBITDA to Consolidated Interest Expense for the period of four fiscal quarters ending nearest to each of the following dates, shall not be less than the following ratios: 12
Fiscal Quarter Ending Nearest to Consolidated Interest Coverage Ratio - -------------------------------------------------------------------------------------- 1999 2000 2001 2002 2003 2004 - -------------------------------------------------------------------------------------- March 31 1.55:1.00 1.80:1.00 N/A 1.60:1.00 2.35:1:00 - -------------------------------------------------------------------------------------- June 30 1.55:1.00 1.70:1.00 N/A 1.80:1.00 2.40:1:00 - -------------------------------------------------------------------------------------- September 30 1.65:1.00 1.70:1.00 1.20:1.00 2.15:1.00 - -------------------------------------------------------------------------------------- December 31 1.65:1.00 1.25:1.00 1.60:1.00 2.25:1.00 - --------------------------------------------------------------------------------------
; provided that (i) for the period of four fiscal quarters ending nearest to September 30, 2001, the Consolidated Interest Coverage Ratio shall be calculated for the two fiscal quarters ended nearest to September 30, 2001 only; and (ii) for the period of four fiscal quarters ending nearest to December 31, 2001, the Consolidated Interest Coverage Ratio shall be calculated for the three fiscal quarters ended nearest to December 31, 2001 only." 18. Fixed Charge Coverage Ratio. Section 6.12 is amended in its entirety as follows: "SECTION 6.12 Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio as of the end of the period of four fiscal quarters ending nearest to the following dates shall not be less than the following ratios, beginning with the fiscal quarter ending nearest to March 31, 1999:
Fiscal Quarter Ending Nearest to Fixed Charge Coverage Ratio - ------------------------------------------------------------------------------ 1999 2000 2001 2002 2003 2004 - ------------------------------------------------------------------------------ March 31 1.05:1.00 1.00:1.00 N/A 0.85:1.00 1.15:1.00 - ------------------------------------------------------------------------------ June 30 1.00:1.00 1.00:1.00 N/A 0.95:1.00 1.15:1.00 - ------------------------------------------------------------------------------ September 30 1.00:1.00 1.00:1.00 0.65:1.00 1.10:1.00 - ------------------------------------------------------------------------------ December 31 1.00:1.00 0.70:1.00 0.85:1.00 1.10:1.00 - ------------------------------------------------------------------------------
; provided that (i) for the period of four fiscal quarters ending nearest to September 30, 2001, the Fixed Charge Coverage Ratio shall be calculated for the two fiscal quarters ended nearest to September 30, 2001 only; and (ii) for the period of four fiscal quarters ending nearest to December 31, 2001, the Fixed Charge Coverage Ratio shall be calculated for the three fiscal quarters ended nearest to December 31, 2001 only." 13 19. Bank Accounts. Article VI is amended by adding the following Section 6.15 at the end thereof: "6.15 BANK ACCOUNTS. Neither Holding, the Borrower nor any Restricted Subsidiary shall open or maintain any new bank account at any financial institution that is not a Lender. Within 90 days of the effectiveness of the Fifth Amendment, Borrower, Wells Fargo Bank, N.A. and the Administrative Agent shall enter into a blocked account agreement providing that upon the occurrence of an Event of Default and notice by the Administrative Agent, all collected amounts in such account will be transferred to Administrative Agent for repayment of the Revolving Loans but without any related commitment reduction." 20. Events of Default. Section 7.01 is amended by deleting the "or" at the end of clause (l) thereof and by adding the following at the end of clause (m) thereof: "(n) the audited financial statements for the fiscal year ending on or about December 31, 2000 delivered pursuant to Section 5.04(a) are materially adversely different than the draft of such financial statements delivered by the Borrower to the Lenders on May 25, 2001 or are not accompanied by an opinion of the Borrower's accountants complying with Section 5.04(a)(i) of the Credit Agreement and a certificate of an officer complying with Section 5.04(d) of the Credit Agreement; or (o) the financial statements for the fiscal quarter ending on or about March 31, 2001 delivered pursuant to Section 5.04(b) are materially adversely different than the draft of such financial statements delivered by the Borrower to the Lenders on June 18, 2001;" 21. Limited Waiver. The undersigned Lenders, constituting Required Lenders under the Credit Agreement, hereby waive (A) compliance with Section 5.04(a) of the Credit Agreement with respect to the fiscal year ending on or about December 31, 2000 until August 15, 2001, on which date such waiver will expire without any further action; (B) the failure to deliver at the time required the financial statements required under Section 5.04(b) of the Credit Agreement with respect to the fiscal quarter ending on or about March 31, 2001; (C) the failure to deliver at the time required the financial statements required under Section 5.04(c) of the Credit Agreement with respect to the fiscal months ending on or about January 31, 2001, February 28, 2001, April 30, 2001 and May 31, 2001; (D) the failure to deliver the certificates required under Section 5.04(d) of the Credit Agreement with respect to the fiscal quarter ended on or about March 31, 2001; and with respect to the fiscal months ending on or about January 31, 2001, February 28, 2001, April 30, 2001 and May 31, 2001 until August 15, 2001, on which date such waiver will expire without any further action, provided that Borrower need not provide the information set forth in subsection (ii) of Section 5.04(d) in the certificates delivered for such periods; and (E) compliance with Section 6.01 from April 1, 2001 through and including the date on which this Amendment and Waiver becomes effective pursuant to paragraph 22 hereof, but only to the extent noncompliance with such section is as a result of the FS Convertible Senior Subordinated Debt incurred in April 2001. Further, the undersigned Lenders, constituting 14 Required Lenders under the Credit Agreement, waive any Defaults or Events of Default under the financial covenants set forth in the Credit Agreement during the period from and including December 29, 2000 through and including the date on which this Amendment and Waiver becomes effective pursuant to paragraph 22 hereof. Without limiting the generality of the provisions of Sections 5.04(a), 5.04(b), 5.04(c), 5.04(d) and 6.01 of and the financial covenants set forth in the Credit Agreement, pursuant to which this waiver is made, the waiver set forth herein shall be limited precisely as written and relates solely to the noncompliance by the Borrower with the provisions of Sections 5.04(a), 5.04(b), 5.04(c), 5.04(d) and 6.01 of and the financial covenants set forth in the Credit Agreement in the manner and to the extent described in this paragraph, and nothing in this paragraph shall be deemed to (a) constitute a waiver of compliance by Borrower with respect to (i) Sections 5.04(a), 5.04(b), 5.04(c), 5.04(d) and 6.01 of and the financial covenants set forth in the Credit Agreement in any other instance or (ii) any other term, provision or condition of the Credit Agreement or any other instrument or agreement referred to therein or (b) prejudice any right or remedy that the Syndication Agent, the Collateral Agent or any Lender may now have (except to the extent such right or remedy was based upon existing defaults that will not exist after giving effect to this Limited Waiver) or may have in the future under or in connection with the Credit Agreement or any other instrument or agreement referred to therein. 22. Binding Effect and Effectiveness. This Amendment and Waiver may be executed in as many counterparts as may be convenient and shall become binding when the Borrower, Holding and the Required Lenders have each executed and delivered at least one counterpart, and shall become legally binding and immediately effective upon satisfaction of the following conditions precedent: (a) The Borrower shall have paid to each Consenting Lender an amendment fee equal to 0.375% of the sum of such Lender's Revolving Credit Commitment and outstanding Term Loans as of the date of this Amendment. A "Consenting Lender" is any Lender that executes and delivers to the Administrative Agent an executed signature page to this Amendment and Waiver at or before 12:00 noon, Los Angeles time, on July 30, 2001. (b) The Borrower shall have paid to the Administrative Agent all fees which are due and payable to the Administrative Agent under the Credit Agreement as amended. The Borrower shall have paid all legal expenses of counsel to Administrative Agent with respect to periods prior to July 18, 2001. (c) The Borrower shall have received, or shall receive concurrently herewith, $18,000,000 in aggregate cash proceeds in connection with the issuance of the Additional Equity, FS Convertible Senior Subordinated Debt or a combination thereof (which may include up to $6,500,000 in FS Convertible Senior Subordinated Debt issued in April and May 2001 and Indebtedness outstanding pursuant to Section 6.01(j) of the Credit Agreement so long as such Indebtedness satisfies the conditions set forth in the definition of "FS Convertible Senior Subordinated Debt" included in this Amendment and Waiver) and shall have applied, or shall apply concurrently herewith, such cash proceeds for working capital purposes or with respect to such cash proceeds received on the Fifth Amendment Effective Date, first to repay outstanding Revolving Loans made for purposes other than Permitted Acquisitions to the full extent thereof 15 and thereafter to repay outstanding Revolving Loans made for the purpose of funding Permitted Acquisitions to the full extent thereof but in either case without any corresponding Revolving Credit Commitment reduction. (d) The Administrative Agent and the Lenders shall have received the quarterly financial statements for the quarter ended on or about March 31, 2001, required pursuant to Section 5.04(b) of the Credit Agreement and the monthly financial statements for the months of January, February, March, April and May in Fiscal Year 2001 required pursuant to Section 5.04(c) of the Credit Agreement. 23. Representations and Warranties. In order to induce Lenders to enter into this Amendment and Waiver, the Borrower and Holding, by its execution of a counterpart of this Amendment and Waiver, represents and warrants that after giving effect to this Amendment and Waiver (a) no Default or Event of Default exists under the Credit Agreement, (b) all representations and warranties contained in the Credit Agreement and the instruments and agreements referred to therein are true, correct and complete in all material respects on and as of the date hereof except to the extent such representations and warranties specifically relate to an earlier date, in which case they were true, correct and complete in all material respects on and as of such earlier date and (c) the Borrower and Holding have performed all agreements to be performed on its part as set forth in the Credit Agreement. 24. Governing Law. THIS AMENDMENT AND WAIVER AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING WITHOUT LIMITATION SECTION 5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES. 25. Reference to Credit Agreement. Except as amended and waived hereby, the Credit Agreement shall remain in full force and effect and is hereby ratified and confirmed in all respects. On and after the effectiveness of the amendment to the Credit Agreement accomplished hereby, each reference in the Credit Agreement to "this Agreement", "hereunder", "hereof", "herein" or words of like import, and each reference to the Credit Agreement shall be deemed a reference to the Credit Agreement, as amended hereby. [remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, the parties hereto have caused this Amendment and Waiver to be duly executed by their respective officers as of the date first above written. HUDSON RESPIRATORY CARE INC. By: /s/ Patrick G. Yount ---------------------------------------- Name: Patrick G. Yount Title: Chief Financial Officer RIVER HOLDING CORP. By: /s/ Patrick G. Yount ---------------------------------------- Name: Patrick g. Yount Title: Chief Financial Officer Acknowledged by: BANKERS TRUST COMPANY, as Administrative Agent and Collateral Agent By: /s/ Mary Jo Jolly ---------------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President SALOMON BROTHERS INC., as Arranger, Advisor and Syndication Agent By: /s/ Allen Fisher ---------------------------------------- Name: Allan Fisher Title: Attorney-in-Fact LENDERS ------- BANKERS TRUST COMPANY By: /s/ Mary Jo Jolly ---------------------------------------- Name: Mary Jo Jolly Title: Assistant Vice President BANK OF AMERICA, N.A. By: /s/ David Maiorella ---------------------------------------- Name: David Maiorella Title: Vice President BANK OF TOKYO-MITSUBISHI TRUST COMPANY By: /s/ David Fraenkel ---------------------------------------- Name: David Fraenkel Title: Vice President BHF (USA) CAPITAL CORPORATION By: /s/ Thomas Dearth ---------------------------------------- Name: Thomas Dearth Title: Associate By: /s/ Ronni J. Leopold ---------------------------------------- Name: Ronni J. Leopold Title: Vice President CITICORP USA, INC. By: /s/ Allen Fisher ---------------------------------------- Name: Allan Fisher Title: Vice President IMPERIAL BANK By: /s/ Thomas G. Kinzel ---------------------------------------- Name: Thomas G. Kinzel Title: Vice President ROYAL BANK OF CANADA By: /s/ Peter Gray-Donald ---------------------------------------- Name: Peter Gray-Donald Title: Senior Manager SOCIETE GENERALE By: /s/ Richard Bernal ---------------------------------------- Name: Richard Bernal Title: Director, Corporate Banking WELLS FARGO BANK, N.A. By: /s/ S. Michael St. Geme ---------------------------------------- Name: S. Michael St. Geme Title: Vice President BANK AUSRTIA CREDITANSTALT CORPORATE FINANCE, INC. By: /s/ Deter Boehme ---------------------------------------- Name: Deter Boehme Title: Executive Vice President By: /s/ Peter Maher ---------------------------------------- Name: Peter Maher Title: Vice President -----END PRIVACY-ENHANCED MESSAGE-----